Question

Jayhawk Company leased a machine from Houston Leasing. The machine had a 5 year life. the lease was for three years and required three payments of $300,000 each made at the beginning of the year starting with January 1, 2018. The lease was non-cancelable, and title did not pass at the end of the lease. There was no bargain purchase right either. However, the present value of the minimum lease payments was greater than 90% of the fair value on January 1, 2018. The cost of the leased equipment was $650,000. Houston's earning's rate is 8%, and there is an ungauranteed residual value of $30,000 at the end of year 3. The actual value at the end of year 3 was $9,000. Houston considers this lease a sale type lease.

On the books of Houston,

a. Determine the lease receivable and prepare an amortization schedule of the lease receivable.

b. Record the inception of the lease on January 1, 2018 and the receipt of the first payment.

c. Record the last receipt from the lease and the return of the equipment.

Answer 1

A. Lease receivable

Present value of 3 rental payments($300,000+$300,000*PVAF(8%,2))	$300,000+$300,000*1.7832	$834,960
Present value of unguaranteed residual value($300,000*PVIF(8%,3))	$300,000*0.7938	$23,814
Lease Receivable		$856,774

Amortion schedule of lease receivable

Date	payment received	Interest@8%on lease receivable	Principle reduction of lease receivable	Lease receivable
1-jan-18				$858,774
1-jan-18	$300000	-	$300000	$558774
1-jan-18	$300000	$44702	$255298	$303476
1-jan-18	$300000	$24278	$275722	$27754
1-jan-18	$30000	$2246	$27754	-
	930000	71226	858774

b. record the inception of lease on jan 1, 18 and first payment receipt(Journal Entry)

Date	Account title	debit($)	credit($)
1-jan	Lease receivable	858774
	Sales revenue		858774
	for recording the lease receivable
1-jan	cost of goods sold	650000
			650000
	for recording the cost of equipiment sold
1-jan	cash	$300000
	Lease receivable		$300000
	To recording the first lease payment

C. record the last receipt from the lease and the return of the equipment

Date	Account title	debit($)	credit($)
1-jan	cash	300000
	Lease receivable		300000
	To record last payment least amount
31-Dec	lease receivble	2246
	interest revenue		2246
	to record interest income
2021
1-jan	Inventory	27754
	lease receivable		27754
	To recording the return equipment