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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)
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ekkarill92 answered 1 year ago
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