Question

Kingbird Corporation enters into a 6-year lease of equipment on December 31, 2019, which requires 6 annual payments of $37,400 each, beginning December 31, 2019. In addition, Kingbird guarantees the lessor a residual value of $22,000 at the end of the lease. However, Kingbird believes it is probable that the expected residual value at the end of the lease term will be $12,000. The equipment has a useful life of 6 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $160,000.

Prepare Lost Ark’s 2019 and 2020 journal entries, assuming the implicit rate of the lease is 11% and this is known to Kingbird.

Answer 1

Journal Entries

December 31, 2019

1. Dr Lease receivables 180706

Cr Asset 180706

2. Dr Cash 37400

Cr lease receivables 37400

Note

There is no finance income for first year as lease receipt receivable start of the year .

December 31 , 2020

1 . Dr Cash 37400

Cr Lease receivable 33660

Cr Finance Income 3740

workings

1 . This lease is a finance lease because

a ) lease term represents the major part of assets economic life

b ) pV of minimum lease payments represents substantially all of the assets's fair value .

2. Unguranted residual value = $ 22000 - $ 12000

= $ 10000

3 .Gross Investment In the Lease = ( $ 37400 * 6 years ) + $ 10000

= $ 234400 ( W N 4 )

4. Calculation of Lease Receivables

Year Receipts Discount factor @11% Present value

o 37400 1 37400

1 37400 0.90 33660   

2 37400 0.81 30294   

3 37400 0.73 27302

4 37400 0.66 24684  

5 37400 0.59 22066

6 10000 0.53 5300

Lease Receivables 180706