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Pina Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6...

Pina Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of $38,200 each, beginning January 1, 2017. In addition, Pina guarantees the lessor a residual value of $18,500 at lease-end. The equipment has a useful life of 7 years. Assume that for Lost Ark Company, the lessor, collectibility is reasonably predictable, there are no important uncertainties concerning costs, and the carrying amount of the equipment is $208,718.

Prepare Lost Ark’s January 1, 2017, journal entries.

Solutions

Expert Solution

Assumption: In absence of information unearned interest is calculated by taking difference between gross Investment and carrying value of assets. As discount rate is not available.

Concept :

Accounting in books of Lessor:

Record the lease receivble on the balance sheet net of any unearned interest.

Gross Investment ( Lease receivable ) = Minimum lease payment* + Unguaranteed residual value.

* Minimum lease payment = Periodic lease payments + Guaranteed Residual value.

Net Investment = present Value of minimum lease payment + present Value of Unguaranteed residual value.

Unearned interest= Gross Investment - Net Investment. ( In given case we take difference between gross Investment and carrying value as discount rate is not available. )

Main answer :

Carrying value = $ 208,718.

Gross Investment ( Lease receivable ) = Lease payment ( yearly ) + guaranteed residual value

$ 38,200 × 6 + $ 18,500.

$ 247,700.

Unearned interest = in absence of discount rate difference between gross Investment and carrying value.

$ 247,700 - $ 208,718.

$ 38,982.

Journal entry in books of Lost Ark company. ( Lessor ).

As on January 1 2017.

Debit : Lease receivable ( gross ) $ 247,700.

Credit : Unearned interest $ 38,982.

Credit : Equipment $ 208,718.

( Being recording lease of equipment ).

Additional information :

Unearned interest has to amortized during the life of lease either straight line every year that is unearned interest divided number of years of lease or discount rate.

ekkarill92 answered 1 year ago
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