Question

Marin Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Cullumber Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Cullumber has the option to purchase the equipment for $21,500 upon termination of the lease. It is not reasonably certain that Cullumber will exercise this option.
2.		The equipment has a cost of $230,000 and fair value of $277,500 to Marin Leasing. The useful economic life is 2 years, with a residual value of $21,500.
3.		Marin Leasing desires to earn a return of 5% on its investment.
4.		Collectibility of the payments by Marin Leasing is probable.

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Part 1

Prepare the journal entries on the books of Marin Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/2012/31/21 1/1/2012/31/2012/31/21	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21 1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21 1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

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List of Accounts

Part 2

Assuming that Cullumber exercises its option to purchase the equipment on December 31, 2021, prepare the journal entry to record the sale on Marin Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
12/31/21	enter an account title for the journal entry on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2021	enter a debit amount	enter a credit amount

Answer 1

Solution

Marin Leasing Company

Part 1

Journal Entries in the books of Marin Leasing

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2020	Lease Receivable	$277,500
	Lease Assets		$277,500
	(To record the inception of lease)
31-12-2020	Cash	$138,754
	Interest Revenue	$13,875
	Lease Receivable	$124,879
	(To record receipt of first annual payment)
12/31/2021	Cash	$138,754
	Interest Revenue	$7,631
	Lease Receivable	$131,123
	(To record second annual payment received)

Computations:

1. Cost of equipment –

Cost of equipment = fair value of equipment – present value of residual value

Fair value of equipment = 277,500

Present value of residual value, $21,500

Fair value = 277,500

Present value of lump sum at 5% for 2 years = 21,500 x 0.907 = $19,500

Cost of equipment = 277,500 – 19,500 = $258,000

Present value of an annuity at 5%, 2 years = 1.85941

Annual payments = 258,000/1.85941 = $138,754

Interest expense = 277,500 x 5% = $13,875

Amortization schedule –

Date	Cash Received	Interest Revenue	Lease Receivable Recovered	Carrying Value
Jan 1, 2020				$277,500
Dec 31, 2020	$138,754	$13,875	$124,879	$152,621
Dec 31, 2021	$138,754	$7,631	$131,123	$21,498

Part 2

Entry to record Cullumber exercises the option to purchase the equipment on Dec 31, 2021:

Date	Account Titles and Explanation	Debit	Credit
31-12-2020	Leased Asset	$21,500
	Cash	$21,500