Question
In: Accounting
Pyre Company leased equipment to the Poland Company on January 1, 2020, for a ten-year period....
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 |
Solutions
Expert Solution
| 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) | ||||
| · Please do upvote if you found the answer useful. | ||||
| · Feel free reach in the comment section in case of any clarification or queries. | ||||
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