Question

Splish Brothers Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $291,000. The fair value of the asset at January 1, 2020, is $291,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $29,100, none of which is guaranteed. 4. The agreement requires equal annual rental payments, beginning on January 1, 2020. 5. Collectibility of the lease payments by Splish Brothers is probable.

Assuming the lessor desires a 9% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and the final answer to 0 decimal places e.g. 5,275.) a)Amount of the annual rental payment-

Prepare an amortization schedule that is suitable for the lessor for the lease term. (Round answers to 0 decimal places e.g. 5,275.) SPLISH BROTHERS LEASING COMPANY (Lessor) Lease Amortization Schedule Date Annual Lease Payment Plus URV Interest on Lease Receivable Recovery of Lease Receivable Lease Receivable 1/1/20 1/1/20 1/1/21 1/1/22 1/1/23 1/1/24 1/1/25 12/31/25

Prepare all of the journal entries for the lessor for 2020 and 2021 to record the lease agreement, the receipt of lease payments, and the recognition of revenue. Assume the lessor’s annual accounting period ends on December 31, and it does not use reversing entries. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Answer 1

a.)

Amount of Annual lease payment

$ 55,965

{ 291,000 - ( 29,100 x 0.59627 ) } / 4.88965

b.)	Date	Annual Lease Payment Plus	Interest on Lease	Recovery of Lease	Lease Receivable
		URV	Receivable @9%	Receivable
	01-01-2020				291,000
	01-01-2020	55,965	-	55,965	235,035
	01-01-2021	55,965	21,153	34,812	200,223
	01-01-2022	55,965	18,020	37,945	162,278
	01-01-2023	55,965	14,605	41,360	120,918
	01-01-2024	55,965	10,883	45,082	75,836
	01-01-2025	55,965	6,825	49,140	26,696
	31-12-2025	29,100	2,404	26,696	0
	Total	364,890	73,890	291,000
c.)	Date	Account Titles	Debit $	Credit $
	01-01-2020	Lease Receivable	291,000
		Cost of goods sold	291,000
		Sales Revenue		291,000
		Equipment		291,000
	01-01-2020	Cash	55,965
		Lease Receivable		55,965
	31-12-2020	Interest Receivable	21,153
		Interest Income		21,153
		(291,000 - 55,965 ) x 9%
	01-01-2021	Cash	55,965
		Lease Receivable		34,812
		Interest Receivable		21,153
	31-12-2021	Interest Receivable	18,020
		Interest Income		18,020
		( 291,000 - 55,965 - 34,812 ) x 9%