Question

The following facts pertain to a noncancelable lease agreement between Windsor Leasing Company and Sheridan Company, a lessee.

Inception Date	May 1st 2017
Annual Lease Payment due at the Beginning of each year, beginning with May 1st, 2017	$21,737.01
Bargain-purchase option price at the end of lease term	$3,800
Lease term	5 years
Economic life of leased equipment	10 year
Lessor's cost	$68,000
Fair Value of asset at May 1st 2017	$93,000
Lessor's Implicit Rate	10%
Lessee's Incremental Borrowing Rate	10%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

1) Compute the amount of the lease receivable at the inception of the lease.

2) Prepare a lease amortization schedule for Windsor Leasing Company for the 5-year lease term.

3) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2017, 2018, and 2019. The lessor’s accounting period ends on December 31. Reversing entries are not used by Windsor.

Answer 1

1	The lease receivable at inception is computed as follow:
	Annual lease payment	$21,737.01
	PV of annuity due of $1 for 5 years @ 10%	4.16986
	PV of periodic rental payments	$90,640.29
	Bargain purchase option	$3,800
	PV of $1 for year 5 @ 10%	0.62092
	PV of bargain purchase option	$2,359.50
	PV of periodic rental payments	$90,640.29
	PV of bargain purchase option	$2,359.50
	Lease receivable at inception	$92,999.78
	As the lease has bargain purchase option at the end of the lease term, this qualifies as
	capital lease, but due to the fact that the minimum lease payment of $92999.78 exceeds
	the lessor's cost of $68000, this lease will be classified as sale-type lease
2	Lease amortization schedule
Date	Annual Lease payment plus BPO	Interest-10%	Recovery of lease receivable	Lease receivable
5/1/2017				$92,999.78
5/1/2017	$21,737.01		$21,737.01	$71,262.77
5/1/2018	$21,737.01	$7,126.28	$14,610.73	$56,652.04
5/1/2019	$21,737.01	$5,665.20	$16,071.81	$40,580.23
5/1/2020	$21,737.01	$4,058.02	$17,678.99	$22,901.24
5/1/2021	$21,737.01	$2,290.12	$19,446.89	$3,454.36
4/30/2022	$3,800.00	$345.65	$3,454.35	$0.00
3	Journal Entries
5/1/2017	Lease receivable	$92,999.78
	Cost of goods sold	$68,000
	Sales		$92,999.78
	Inventory		$68,000
12/31/2017	Interest receivable	$4,750.85
	Interest revenue		$4,750.85
	(71262.77 x 10% x 8/12)
5/1/2018	Cash	$21,737.01
	Lease receivable		$14,610.73
	Interest receivable		$4,750.85
	Interest revenue (7126.28-4750.85)		$2,375.43
12/31/2018	Interest receivable	$3,776.80
	Interest revenue		$3,776.80
	(56652.04 x 10% x 8/12)
5/1/2019	Cash	$21,737.01
	Lease receivable		$16,071.81
	Interest receivable		$3,776.80
	Interest revenue (7126.28-4750.85)		$1,888.40
12/31/2019	Interest receivable	$2,705.35
	Interest revenue		$2,705.35
	(40580.23 x 10% x 8/12)