Question

Alexis Computer Company manufactures and sells or leases various types of computer equipment. On 1/1/17, Alexis leased a complete computer system to Edgar Enterprises.  Data relating to the lease follow:

                Cost of equipment to Alexis                                       $ 80,000

                Fair market value of equipment at 1/1/17                   $ 98,000

                Useful life of equipment                                               8 years

                Lease term 5 years

                Residual value at the end of the lease

                    (notguaranteed by Edgar)                                    $ 15,000

                Implicit and incremental interest rates                               10%

                Initial direct costs incurred in negotiation                    $   1,000

Both the lessor and lessee use straight-line depreciation and have accounting periods that end on 12/31.

        Required:

a. Calculate the yearly payment that Alexis will charge Edgar under this lease agreement if payments are made on 1/1 of each year, beginning 1/1/17.

        b.     Prepare all journal entries that would be made by Alexis (lessor) during 2017 and 2018 relating to this lease.

        c.     Prepare all journal entries that would be made by Edgar (lessee) during 2017 and 2018 relating to this lease.

        d.     Prepare the journal entries made by both Alexis and Edgar with respect to the lease termination if the actual residual value of the computer equipment is $12,500.

Answer 1

Requirement a.
Yaer	CF	10%	PV
1	$ 25,852	0.909091	$ 23,502
2	$ 25,852	0.826446	$ 21,365
3	$ 25,852	0.751315	$ 19,423
4	$ 25,852	0.683013	$ 17,657
5	$ 25,852	0.620921	$ 16,052
			$ 98,000
Yearly payment is $ 25,852/-

Requirement b.
2017	lease receivables	98000
	To Equiment		80000
	To Gain on sale of asset		18000
	(being equipment leased on finance lease)
	Cash/bank	$ 25,852
	To Lease receivables		$ 23,502
	To Interest income		$    2,350
	(Being lease payment received)
2018	Cash/bank	$ 25,852
	To Lease receivables		$ 21,365
	To Interest income		$    4,487
	(Being lease payment received)

Requirement c.
2017	Equipment	98000
	To Lease payable		98000
	(Being asset purchased)
	Lease payable	$ 23,502
	Interest expenses	$    2,350
	To Cash/bank		$ 25,852
	(Being lease payment made)
2018	Lease payable	$ 21,365
	Interest expenses	$    4,487
	To Cash/bank		$ 25,852
	(Being lease payment made)

Requirement d.
Alexi
Cash/bank	$ 36,305
To Interest Income		$ 13,762
To Lease receiable		$ 22,542
(being last payment received)
Edgar
Lease payable	$ 22,542
Interest expenses	$ 13,762
To Cash/bank		$ 36,305
(being last payment made)

Yaer	CF	10%	PV
1	$ 23,805	0.909091	$ 21,641
2	$ 23,805	0.826446	$ 19,673
3	$ 23,805	0.751315	$ 17,885
4	$ 23,805	0.683013	$ 16,259
5	$ 23,805	0.620921	$ 14,781
5	$ 12,500	0.620921	$    7,762
			$ 98,000