Question

Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. 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 an unguaranteed residual value of $20,000 accruing to the benefit of Edom.
3.	Davis agrees to pay all executory costs.
4.	The interest rate implicit in the lease is 14%.
5.	The initial direct costs are insignificant and assumed to be zero.
6.	The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.

Required:

1.	Next Level Determine if the lease is a sales-type or direct financing lease from Edom’s point of view (calculate the selling price and assume that this is also the fair value).
2.	Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.
3.	Prepare journal entries for Edom, the lessor, for the years 2016 and 2017.

Answer 1