Question

Franklin Co. leased its manufactured equipment to Parker Inc. for a 4-year term. Franklin Co. reported a book value of $121,000 for the equipment in its inventory account. The lease commenced on January 1, 2020, with the first annual payment of $40,700 due immediately. The equipment has a useful life of 4 years, an estimated fair value of $151,536, and no residual or salvage value. The implicit rate of the lease is 5% and collectibility of the lease payments from Parker is probable. Record Franklin’s journal entries at the commencement of the sales-type lease.

Answer 1

In case of Sales-type lease, lessor records entry as sales for the amount of lease payments at present value of future cash flows or at estimated fair value

So here the estimated fair value of the equipment is $1,51,536, the same have to be recorded as sales income

Journal entries at the commencement of the sales-type lease.

1) Lease Receivable A/C_________________Dr. $1,62,800 (40,700*4)

Cost of Goods Sold A/C________________Dr. $1,21,000 (Carrying Value of Equipment)

   To Sales A/C $1,51,536 (Fair Value of Equip)

To Inventories A/C $1,21,000 (Carrying Value of Equipment)

To Unearned Interest Income A/C $11,264 (Lease Receivable - Fair Value)

(Being Sales-Type Lease contract executed)

2) cash / Bank A/C________________________Dr. $40,700

To Lease Receivable A/C $40,700

(Being Lease Payment Received for First Year)

Journal Entries From 2nd Year onwars (For Knowledge Purpose, as onlyJournal Entries as commencement is asked)

1) cash / Bank A/C________________________Dr. $40,700

To Lease Receivable A/C $40,700

(Being Lease Payment Received for First Year)

2) Unearned Interest Income A/C_____________Dr XXXXXXX

To Interest Income A/C XXXXXXX

(Interest amount to be recorded after calculating the same)

Hint : For 2nd year Interest is 5542 For 3rd Year 3784 For 4th Year 1938, You can do your own