Question

Question 12

The following facts pertain to a non-cancelable lease agreement between Shamrock Leasing Company and Pharoah Company, a lessee.

Commencement date		May 1, 2020
Annual lease payment due at the beginning of
each year, beginning with May 1, 2020		$17,865.02
Bargain purchase option price at end of lease term		$7,000
Lease term		5	years
Economic life of leased equipment		10	years
Lessor’s cost		$65,000
Fair value of asset at May 1, 2020		$85,000
Lessor’s implicit rate		6	%
Lessee’s incremental borrowing rate		6	%

1. Compute the amount of the lease receivable at commencement of the lease. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answer to 2 decimal places, e.g. 5,275.15.)

2. Suppose the collectibility of the lease payments was not probable for Shamrock. Prepare all necessary journal entries for the company in 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.15.)

Answer 1

Date   Annual Lease   Interest (6%) on Unpaid   Reduction of Lease   Balance of Lease
Payment/Receipt   Liability/Receivable   Liability/Receivable   Liability/Receivable

01-May-20               85,000
01-May-20   17,865.02           67134.98
01-May-21   17,865.02   4,028   13,836.92   53298.05
01-May-22   17,865.02   3,197.88   14,667.13   38,630.91
01-May-23   17,865.02   2,317.85   15.547.16   23,083.74
01-May-24   17,865.02   1,385.02   16,479.99   6,603.74
31-05-2024   7000   396.22   6,603.7   0
96,325.1   11,324.97   67,137.9  
Journal Entry
Date   Accoutn Tittle   Debit   Credit
01-05-2020   sales   85,000.00  
Cost of Goods Sold   65,000.00  
Lease Receivable       85,000.00
Inventory       65,000.00
To Recor dthe Lease      
01-05-2020   Cash   17,865.02  
Lease Receivable       17,865.02
To Record Lease Payment      
31-05-2020   Interest Receivable   2685  
Interest Revenue       2,685
(4028.09/12*8)      
01-05-2021   cash   17865.02  
Interest Receivable       2,685.44
Interest Revenue (4028/12*4)       1342.66
Lease Receivable       13,836.92
31-05-2021   Interest Receivable   2,131.92  
Interest Revenue       2,131.92
(3197.88/12*8)      

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