Question

On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $969,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2021, will be $313,000. Negotiations led to the lessee guaranteeing a $366,000 residual value.

Equal payments under the finance/sales-type lease are $213,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 6% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables )
Required:
1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2018, to record the lease.
2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2018, related to the lease.

Answer 1

Answer:

1.) Prepare the journal entries K and A on January 1 2018 to record the lease

In the books of Karrier (Lessee):

Date	particulars	Debit ($)	Credit ($)
	Right to use equipment (w.notes)	780047
	Lease Liability		780047
	(To record the lease asset and lease liability)

In the books of Allied (Lessor):

Date	Particulars	Debit ($)	Credit ($)
	Lease receivable (w.notes)	780047
	Residual asset	188953
	(969000-(780047/969000*969000))
	Asset for lease		969000
	(To record the lease receivable and residual asset)

Working Note:

Calculation of present value of lease payments:

particulars	Amount ($)
Present value of periodic lease payments	738066
(213000*3.4651 (PVIFA 6%,4))
Add: Present value of excess lessee guarantee residual value	41981
(53000*0.79209 (PVIF 6%, 4))
Present value of lease payments	780047

2.) Prepare the journal entries for both Karrier and Allied on December 31 2018 related to lease:

In the books of Karrier (Lessee):

Date	Particulars	Debit ($)	Credit ($)
	Interest expense (780047*6%)	46803
	Lease liability (Difference)	166197
	Cash (Lease payment)		213000
	(To record the lease payment)
	Amortization expense (780047/4 years)	195012
	Right of use asset		195012
	(To record the amortization expense)

In the books of Allied (Lessor):

Date	Particulars	Debit ($)	Credit ($)
	Cash (lease payment)	213000
	Lease receivable (difference)		166197
	Interest revenue		46803
	(To record the lease receivable)
	Residual asset (188953*6%)	11337
	Accretion revenue		11337
	(To record the accretion revenue)