Question

Concord Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $318,274, and its unguaranteed residual value at the end of the lease term is estimated to be $18,100. National will pay annual payments of $39,500 at the beginning of each year. Concord incurred costs of $182,900 in manufacturing the equipment and $3,900 in sales commissions in closing the lease. Concord has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 6%.

QUESTIONS

Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 5,275.)

1A. LEASE RECEIVABLE

2B. SALES PRICE

3. Prepare a 10-year lease amortization schedule for Concord, the lessor. (Round answers to 0 decimal places e.g. 5,275.)

4. Prepare all of the lessor’s journal entries for the first year. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 5,275.)

....

....

....

....

(TO REOCRD THE SALE AND THE COGs In the lease transaction)

....

...

(TO RECORD payment of the initital direct costs relating to the lease)

....

....

(TO RECORD RECEIPT OF THE FIRST LEASE PAYMENT)

....

....

(TO RECORD INTEREST EARNED DURING THE FIRST YEAR OF LEASES.)

Answer 1

Solution:

(1)-Computation of Amount of Lease Receivable:

Present value of an annuity due for 10 periods discounted at 6%......8.14026

Annual lease payment .......$39,500

Present value of the 10 rental payments.....3,21,540

Add: present value of estimated residual value of $20,000 in 10 years at 6%.

=($18,100*0.22839)

=10106.859

=10,107(Approx)

Lease receivable at an inception = 3,21,540+10,107

Therefore Lease Receivable = $3,31,647

(2)-Computation of sales price:

Sale price = present value of 10 annual lease payments

                  = $3,21,540

                                            (or)

Initial present value – present value of the un-guaranteed residual value

=3,31,647 – 10,107

= 3,21,540.

Computation of Sales :

Cost of the asset – present value of the unguaranteed residual value

=1,82,900 - 10,107

= $ 1,72,793.

(3) : CONCORD COMPANY

Lease Amortization Schedule

Annuity Due basis ,Unguaranteed residual value

(4) - Journal entries od the Lessors for the 1st year: