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Question 11

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Windsor Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Wildhorse Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Wildhorse has the option to purchase the equipment for $25,500 upon termination of the lease. It is not reasonably certain that Wildhorse will exercise this option.
2.		The equipment has a cost of $310,000 and fair value of $363,000 to Windsor Leasing. The useful economic life is 2 years, with a residual value of $25,500.
3.		Windsor Leasing desires to earn a return of 5% on its investment.
4.		Collectibility of the payments by Windsor Leasing is probable.

Click here to view factor tables.Prepare the journal entries on the books of Windsor Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/2012/31/21	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

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List of Accounts

  

  

Assuming that Wildhorse exercises its option to purchase the equipment on December 31, 2021, prepare the journal entry to record the sale on Windsor Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
12/31/21	enter an account title for the journal entry on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2021	enter a debit amount	enter a credit amount

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List of Accounts

  

  

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Answer 1

Requirement 1:

Date	Account title and Explanation	Debit	Credit
1/1/2012	Lease receivable	$363,000
	Cost of goods sold [310000-23129]	$286,871
	Sales		$339,871
	Equipment		$310,000
12/31/2012	Cash	$182,784
	Lease receivable		$164,634
	Interest revenue [ 363000 x 5%]		$18,150
12/31/2012	Cash	$182,784
	Lease receivable		$172,866
	Interest revenue [(363000-164634) x 5%]		$9,918

Calculations:

Fair value of the equipment	$363,000
(Less): Present value of residual value	($23,129)
[$25,500 x 0.90703 present value factory (5%, 2 years)]
Present value of lease payments	$339,871
Annual lease payment [$339,871 ÷ 1.85941 PV annuity factor (5%, 2 years)]	$182,784

Requirement 2:

Date	Account title and Explanation	Debit	Credit
12/31/2012	Cash	$25,500
	Lease receivable		$25,500