Question

Carla Vista Company leases a building to Walsh, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1.		The lease term is 4 years, with equal annual rental payments of $4,429 at the beginning of each year.
2.		Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3.		The building has a fair value of $17,500, a book value to Carla Vista of $10,500, and a useful life of 5 years.
4.		At the end of the lease term, Carla Vista and Walsh expect there to be an unguaranteed residual value of $2,625.
5.		Carla Vista wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

(b)

Using the original facts of the lease, show the journal entries to be made by both Carla Vista and Walsh in 2020. (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. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Answer :

Journal Entry - Carla Vista

Date	Account titale	Debit	Credit
Jan 01.2020	Lease Recievable	$17,500.00
	Cost of goods sold (BF)	$8,640.08
	Sales Revenue (3.53129*4429)		$15,640.08
	Inventory (Book Value)		$10,500.00
	(To Record lease)
Jan 01.2020	Cash	$4,429.00
	Lease Receivable		$4,429.00
	(To Record first payment made)
Dec 31.2020	Lease Receivalbe (17500-4429)*9%	$1,176.39
	Interest Revenue		$1,176.39
	(To Record interest revenue)
	($23,000 - $4,703)*8%

Journal Entries - Walsh's

Date	Account title	Debit	Credit
Jan 01 2020	Right to use asset	$15,640
	Lease Liability		$15,640
	(To Record Lease)
Jan 01 2020	Leae liability	$4,429
	Cash		$4,429
	(To Record first payment made)
Dec 31.2020	Interest Expense (15640 - 4429)*9%	$1,009
	Lease liability		$1,009
	(To Record interest expense)
Dec 31.2020	Depreciation Expense (15640/4)	$3,910
	Right to use asset		$3,910
	(To Record depreciation)

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