In: Accounting
Brief Exercise 21-11
Assume that IBM leased equipment that was
carried at a cost of $174,000 to Sandhill Company. The term of the
lease is 5 years December 31, 2019, with equal rental payments of
$39,661 beginning December 31, 2019. The fair value of the
equipment at commencement of the lease is $174,001. The equipment
has a useful life of 5 years with no salvage value. The lease has
an implicit interest rate of 7%, no bargain purchase option, and no
transfer of title. Collectibility of lease payments for IBM is
probable. Assume the sales-type lease was recorded at a present
value of $174,001.
Prepare IBM’s December 31, 2020, entry to record the lease
transaction with Sandhill Company.
Under US Gaap if either of criteria is fulfilled they are classifed as operating lease :
As the life of asset is 5 year and lease period is also five year hence criteria of term of lease exceeds 75% of asset's useful live.
Further the present value of lease payment is 100% of fair market value of asset.
Hence this is the case of operating lease as per US GAAP.
IBM is lessor and lessor will intially recognise sale of asset and lease receivable to the extent of book value.
Subsequantly to the extent of books value of lease installment is credited against lease receivable and interest income is recongnised.
Journal Entry in books of IBM Ltd for the period 31st Dec 2020
Date | Accounts | Debit | Credit |
31-Dec-20 | Cash A/c Dr | 39,661.00 | |
Lease Receivable | 30,257.20 | ||
Interest on lease | 9,403.80 | ||
(To record receipt of lease) |
Working Note : Schedule of lease installment bifurcation in book value and principal value :
Year | Opbalance | Installment | Interest | Book Value repayment | Closing Balance |
0 | 174,001.00 | 39,661.00 | - | 134,340.00 | |
1 | 134,340.00 | 39,661.00 | 9,403.80 | 30,257.20 | 104,082.80 |
2 | 104,082.80 | 39,661.00 | 7,285.80 | 32,375.20 | 71,707.60 |
3 | 71,707.60 | 39,661.00 | 5,019.53 | 34,641.47 | 37,066.13 |
4 | 37,066.13 | 39,661.00 | 2,594.63 | 37,066.37 | (0.24) |
Total | 174,001.19 | 21,229.16 | 113,111.03 |