Question

10.

On January 1, 2021, Central Industries leased a high-performance conveyer to Dynamic Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Central. The equipment cost Central $2,912,000 and has an expected useful life of five years. Central expects the residual value at December 31, 2025, will be $700,000. Negotiations led to the lessee guaranteeing a $680,000 residual value.

Equal payments under the finance/sales-type lease are $500,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Dynamic is aware that Central used a 5% 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 provided.)

Required:

1. Prepare the appropriate journal entries for both Dynamic and Central on January 1, 2021, to record the lease.
2. Prepare all appropriate journal entries for both Dynamic and Central on December 31, 2021, related to the lease.

Answer 1

*Present Value of Lease Payment for lessee = PV of Lease Payment + PV of excess lease guaranteed

= (500,000 * 3.5460) +  (700,000 - 680,000) * 0.8227

= $1,789,454

* Present Value of Lease Payment for lessor = PV of Lease Payment + PV of residual value + PV of excess lease guaranteed

= (500,000 * 3.5460) + 680,000 * 0.8227 + (700,000 - 680,000) * 0.8227

= $2,348,890

Journal entries
Date	General Journal	Debit	Credit
Jan 1, 2021	Right of use asset	$        1,789,454
	Lease Payable		$          1,789,454
Jan 1, 2021	Lease receivable	$   2,348,890
	Cost of Goods Sold	$ 2,912,000
	Equipment		$          2,912,000
	Sales Revenue		$ 2,348,890
Dec 31, 2021	Interest Expense (1,789,454 * 5%)	$ 89,473
	Lease Payable	$ 410,527
	Cash		$ 500,000
Dec 31, 2021	Amortization Expense (1,789,454 / 4)	$ 447,364
	Right of use Asset		$ 447,364
Dec 31, 2021	Cash	$ 500,000
	Lease receivable		$ 382,555
	Interest Revenue (2,348,890 * 5%)		$ 117,445

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