Question

Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

1.	The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year.
2.	The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has a residual value of $20,000 which is guaranteed by Davis Company (the lessee).
3.	Davis agrees to pay all executory costs directly to a third party.
4.	The interest rate implicit in the lease is 14%.
5.	The initial direct costs are insignificant and assumed to be zero.
6.	It is probable that Edom will collect the lease payments.

Required:

1.	Next Level Assuming that the lease is a sales-type lease, calculate the selling price.
2.	Prepare a table summarizing the lease receipts and interest income earned by Edom.
3.	Prepare journal entries for Edom for the years 2019 and 2020.

CHART OF ACCOUNTS
Edom Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 123 Equipment Leased to Others 124 Unguaranteed Residual Asset 141 Inventory 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Interest 251 Unearned Interest: Leases 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue 433 Interest Income EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 559 Miscellaneous Expenses 910 Income Tax Expense

1. Assuming that the lease is a sales-type lease, calculate the selling price.

$

2. Prepare a table summarizing the lease receipts and interest income earned by Edom.

Additional Instructions

Edom Company

Summary of Lease Payments Received and Interest Income Earned

1	Date	Annual Lease Payments Received	Interest Income at 14% on Lease Receivable	Lease Receivable
2	January 1, 2019
3	January 1, 2019
4	December 31, 2019
5	January 1, 2020
6	December 31, 2020
7	January 1, 2021
8	December 31, 2021
9	January 1, 2022
10	December 31, 2022
11	January 1, 2023
12	December 31, 2023

3a. Prepare journal entries for Edom for the year 2019.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8

3b. Prepare journal entries for Edom for the year 2020.

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4

Answer 1

Lease Payments	$100,000
PV Factor (14%,5)	3.91371
PV of Lease Payments	$391,371.23
Selling Price	$391,371.23

1	Date	Annual Lease Payments Received	Interest Income at 14% on Lease Receivable	Lease Receivable
2	1-Jan-19			$401,759
3	1-Jan-19	$100,000		$301,759
4	31-Dec-19		$42,246.26	$344,005
5	1-Jan-20	$100,000		$244,005
6	31-Dec-20		$34,160.74	$278,166
7	1-Jan-21	$100,000		$178,166
8	31-Dec-21		$24,943.24	$203,109
9	1-Jan-22	$100,000		$103,109
10	31-Dec-22		$14,435.29	$117,545
11	1-Jan-23	$100,000		$17,545
12	31-Dec-23		$2,456.23	$20,000

Date	Account Titles	Debit	Credit
1-Jan-19	Lease Receivable (10000*5+20000)	$520,000.00
	Cost of the Asset	$302,613
	Sales Revenue		$391,371
	Unearned Interest		$118,241
	Equipment Leased to Others		$313,000
31-Dec-19	Cash	$100,000
	Lease Receivable		$100,000
31-Dec-19	Unearned Interest	$42,246
	Interest Revenue		$42,246
1-Jan-20	Cash	$100,000
	Lease Receivable		$100,000
31-Dec-20	Unearned Interest	$34,161
	Interest Revenue		$34,161