Question

Assume that IBM leased equipment that was carried at a cost of $120,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2020, with equal rental payments of $28,430 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $145,000. The equipment has a useful life of 6 years with no residual value. The lease has an implicit interest rate of 7%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM.

The present value of an annuity due, 6 years, 7% is 5.10020

Financing Lease (or sales type)
LESSOR'S PERSPECTIVE
Why is this a financing lease?
What type of financing lease is this from the lessor's perspective?
A financing lease should be recorded by the lessee and lessor as an asset and liability at the lower of either the fair value or present value of minimum lease payments. Which one in this case?
Prepare IBM’s January 1, 2020, journal entries at the inception of the lease.
				Debit	Credit		Implicit Interest Rate			7%
1/1/20
							Time	Payment	Interest	Principle	Balance
							0
							1
				Debit	Credit		2
1/1/20							3
							4
							5
Prepare IBM’s December 31, 2020, entry to record interest.
				Debit	Credit
12/31/20
Prepare IBM’s January 1, 2021 entry to record the receipt of the lease payment
				Debit	Credit
1/1/21
Prepare IBM’s December 31, 2021, entry to record interest.
				Debit	Credit
12/31/21
Prepare IBM’s January 1, 2022 entry to record the receipt of the lease payment
				Debit	Credit
1/1/22

Answer 1

Date	Account	Debit	Credit
1/1/20.	Lease receivable	$        145,000
	Equipment		$        145,000
	(Being lease of equipment is recorded)
1/1/20.	Cash	$          28,430
	Lease receivable		$          28,430
	(entry to record first lease payment)
12/31/20.	Interest receivable	$            8,160
	Interest revenue		$            8,160
	(interest for first period)
1/1/21.	Cash	$          28,430
	Interest receivable		$            8,160
	Lease receivable		$          20,270
	(entry to record second lease payment)
12/31/21.	Interest receivable	$            6,741
	Interest revenue		$            6,741
	(interest for second period)
1/1/22.	Cash	$          28,430
	Interest receivable		$            6,741
	Lease receivable		$          21,689
	(entry to record third lease payment)

Schedule for interest and lease receivable:

Period	Lease receivable beginning	Interest	payment	Lease receivable adjustment	Lease receivable ending
	(a)	(b) = (a) × 7%	(c)	(d) = (c) - (b)	(a) - (d)
2020	$        145,000	$                   -	$          28,430	$          28,430	$        116,570
2020	$        116,570	$            8,160	$          28,430	$          20,270	$          96,300
2021	$          96,300	$            6,741	$          28,430	$          21,689	$          74,611
2022	$          74,611	$            5,223	$          28,430	$          23,207	$          51,404
2023	$          51,404	$            3,598	$          28,430	$          24,832	$          26,572
2024	$          26,572	$            1,860	$          28,430	$          26,570	$                    2

Please rate.