Question

Rexon Company leases non-specialized equipment to Ten-Care Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

1.	The lease term is 8 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.
2.	The cost of the equipment is $400,000. The equipment has an estimated life of 8 years and has a zero estimated value at the end of that time.
3.	The equipment has a fair value of $400,000.
4.	Ten-Care agrees to pay all executory costs directly to a third party.
5.	The lease contains no renewal or bargain purchase option.
6.	The interest rate implicit in the lease is 14%.
7.	The initial direct costs are insignificant and assumed to be zero.
8.	It is probable that Rexon will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

Required:

1.	Next Level Assuming that the lease is a sales-type lease from Rexon’s point of view, calculate the amount of the equal rental receipts.
2.	Prepare a table summarizing the lease receipts and interest income earned by Rexon.
3.	Prepare journal entries for Rexon for the years 2019 and 2020.

CHART OF ACCOUNTS
Rexon Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 123 Equipment Leased to Others 141 Inventory 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Interest 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 from Rexon’s point of view, calculate the amount of the equal rental receipts.

Additional Instruction

$

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

Additional Instructions

Rexon Company

Summary of Lease Payments Received and Interest Income Earned

1	Date	Annual Lease Payment Received	Interest Income at 14% on Net Investment	Reduction of Lease Receivable	Lease Receivable
2	January 1, 2019
3	December 31, 2019
4	December 31, 2020
5	December 31, 2021
6	December 31, 2022
7	December 31, 2023
8	December 31, 2024
9	December 31, 2025
10	December 31, 2026

3a. Prepare the journal entries for 2019.

General Journal Instructions

PAGE 2019

GENERAL JOURNAL

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

3b. Prepare the journal entries for 2020.

PAGE 2020

GENERAL JOURNAL

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

Answer 1

1.

Calculation of Annual Rent @14%
Year	Rate@14%
1	0.877
2	0.769
3	0.675
4	0.592
5	0.519
6	0.456
7	0.400
8	0.351
Total Annuity	4.639
Total Lease Receivale	400000.000
Lease Receivable/Annuity	86230.257

2.

table summarizing the lease receipts and interest income earned by Rexon
Year	Annual Lease Payment Received	Interest Income 14% on Net Investment	Reduction of Lease Receviable	Lease Receivable
0				400000
1	86,230	56,000	30,230	3,69,770
2	86,230	51,768	34,462	3,35,307
3	86,230	46,943	39,287	2,96,020
4	86,230	41,443	44,787	2,51,233
5	86,230	35,173	51,058	2,00,175
6	86,230	28,024	58,206	1,41,969
7	86,230	19,876	66,355	75,614
8	86,230	10,616	75,614	(0)

3.

Journal Entries
Date	Particular	DR	CR
01-01-19	Lease Receivable	400000
	Asset		400000
31-12-19	Bank A/c Dr	86230.26
	To Interest Income		56000
	TO Lease Receivable		30230.26
31-12-20	Bank A/c Dr	86230.26
	To Interest Income		51,768
	TO Lease Receivable		34,462
31-12-21	Bank A/c Dr	86230.26
	To Interest Income		46,943
	TO Lease Receivable		39,287
31-12-22	Bank A/c Dr	86230.26
	To Interest Income		41,443
	TO Lease Receivable		44,787
31-12-23	Bank A/c Dr	86230.26
	To Interest Income		35,173
	TO Lease Receivable		51,058
31-12-24	Bank A/c Dr	86230.26
	To Interest Income		28,024
	TO Lease Receivable		58,206
31-12-25	Bank A/c Dr	86230.26
	To Interest Income		19,876
	TO Lease Receivable		66,355
31-12-26	Bank A/c Dr	86230.26
	To Interest Income		10,616
	TO Lease Receivable		75,614