In: Accounting
Pyre Company leased equipment to the Poland Company on January 1, 2020, for a ten-year period. Equal annual payments under the lease are $240,000 and are due on January 1 of each year beginning on the date the lease was signed. The rate of interest used by Pyre to compute the lease payments is 9%. The lease receivable before the first payment is $1,678,860, and the cost of the equipment on Pyre’s accounting records was $1,488,000.
Assuming that the lease is appropriately recorded as a sale for accounting purposes, write the entries required on the date the lease is signed and on December 31, 2020.
Date |
Account Titles |
Debit |
Credit |
Year | Payments (Cash flows) | Present Value Factor @9%p.a. | Discounted Cash flows/ Present value | |
1 | $ 240,000 | 1 | $ 240,000 | |
2 | $ 240,000 | 0.91743 | $ 220,183 | |
3 | $ 240,000 | 0.84168 | $ 202,003 | |
4 | $ 240,000 | 0.77218 | $ 185,324 | |
5 | $ 240,000 | 0.70843 | $ 170,022 | |
6 | $ 240,000 | 0.64993 | $ 155,984 | |
7 | $ 240,000 | 0.59627 | $ 143,104 | |
8 | $ 240,000 | 0.54703 | $ 131,288 | |
9 | $ 240,000 | 0.50187 | $ 120,448 | |
10 | $ 240,000 | 0.46043 | $ 110,503 | |
Total | $ 2,400,000 | $ 1,678,860 | ||
Lease Amortisation Schedule: | ||||
Beg of year |
Annual Lease Payments Plus expected residual value |
Interest on lease receivable | Recovery of lease receivable | Lease receivable |
0 | $ - | $ - | $ - | $ 1,678,860 |
1 | $ 240,000 | $ - | $ 240,000 | $ 1,438,860 |
2 | $ 240,000 | $ 129,497 | $ 110,503 | $ 1,328,358 |
3 | $ 240,000 | $ 119,552 | $ 120,448 | $ 1,207,910 |
4 | $ 240,000 | $ 108,712 | $ 131,288 | $ 1,076,622 |
5 | $ 240,000 | $ 96,896 | $ 143,104 | $ 933,518 |
6 | $ 240,000 | $ 84,017 | $ 155,983 | $ 777,534 |
7 | $ 240,000 | $ 69,978 | $ 170,022 | $ 607,512 |
8 | $ 240,000 | $ 54,676 | $ 185,324 | $ 422,189 |
9 | $ 240,000 | $ 37,997 | $ 202,003 | $ 220,185 |
10 | $ 240,000 | $ 19,815 | $ 220,185 | $ 0 |
Note: As the lease payment is made at the beginning of the year, interest will be calculated on Opening lease liability less lease payment . | ||||
a | In the books of Lessor | |||
Journal Entries for Sale type lease | ||||
Date | Particulars | Debit | Credit | |
01-01-20 | Lease Receivable | $ 1,678,860 | ||
Cost of Sales less PV of unguaranteed residual value | $ 1,488,000 | |||
Gain on sale of Equipment | $ 190,860 | |||
(To record asset given on lease under sale type lease ) | ||||
Cost of truck is not given | ||||
01-01-20 | Cash | $ 240,000 | ||
Lease Receivable | $ 240,000 | |||
(To record 1st lease payment received) | ||||
31-12-20 | Lease Receivable | $ 129,497 | ||
Interest income | $ 129,497 | |||
(To record Interest income on lease receivable) | ||||
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