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In: Accounting

On January 1st you sold and purchased a capital lease for a 10 year period. The...

On January 1st you sold and purchased a capital lease for a 10 year period. The yearly annuity due payments were $100,000 with guaranteed salvage value of $75,000 and bargain purchase options of $100,000. The discount rate s 6%. The title has transferred and the transaction qualifies for capital purchase. Prepare a journal entries for 10 years for both buyer and seller as a sales type lease. Cost of goods sold is 75% of sales price.

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Expert Solution

In the Books of Buyer
Date Account description Debit Credit
1-Jan Lease Assets          833,728
Lease Obligation          833,728
(Being Lease Recorded)
31-Dec Lease Obligation            49,976
Depreciation of Lease Assets            75,873
Interest Expenses            50,024
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            52,975
Depreciation of Lease Assets            75,873
Interest Expenses            47,025
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            56,153
Depreciation of Lease Assets            75,873
Interest Expenses            43,847
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            59,523
Depreciation of Lease Assets            75,873
Interest Expenses            40,477
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            63,094
Depreciation of Lease Assets            75,873
Interest Expenses            36,906
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            66,880
Depreciation of Lease Assets            75,873
Interest Expenses            33,120
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            70,892
Depreciation of Lease Assets            75,873
Interest Expenses            29,108
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            75,146
Depreciation of Lease Assets            75,873
Interest Expenses            24,854
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            79,655
Depreciation of Lease Assets            75,873
Interest Expenses            20,345
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation            84,434
Depreciation of Lease Assets            75,873
Interest Expenses            15,566
Cash          100,000
Accumulated Depreciation            75,873
(Lease Payment Recorded)
31-Dec Lease Obligation          175,000
Cash          175,000
(Paid for Purchase of Assets and Salavge Value Payment)
In the Books of Seller
Date Account description Debit Credit
1-Jan Lease Receivable    833,728
To Assets    833,728
(Being Lease Recorded)
31-Dec Cash    100,000
Interest Income      50,024
Lease Receivable      49,976
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      47,025
Lease Receivable      52,975
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      43,847
Lease Receivable      56,153
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      40,477
Lease Receivable      59,523
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      36,906
Lease Receivable      63,094
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      33,120
Lease Receivable      66,880
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      29,108
Lease Receivable      70,892
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      24,854
Lease Receivable      75,146
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      20,345
Lease Receivable      79,655
(Being Lease Income Recorded)
31-Dec Cash    100,000
Interest Income      15,566
Lease Receivable      84,434
(Being Lease Income Recorded)
31-Dec Cash    175,000
Lease Receivable    175,000
(Sale of Assets)

Workings:

Cashflow PV Factor Present Value
1          100,000 0.943396          94,340
2          100,000 0.889996          89,000
3          100,000 0.839619          83,962
4          100,000 0.792094          79,209
5          100,000 0.747258          74,726
6          100,000 0.704961          70,496
7          100,000 0.665057          66,506
8          100,000 0.627412          62,741
9          100,000 0.591899          59,190
10          100,000 0.558395          55,839
10            75,000 0.558395          41,880
10          100,000 0.558395          55,839
      833,728
Cashflow Interest Lease Obligation Depreciation
0          833,728
1          100,000          50,024          783,751              75,873
2          100,000          47,025          730,777              75,873
3          100,000          43,847          674,623              75,873
4          100,000          40,477          615,101              75,873
5          100,000          36,906          552,007              75,873
6          100,000          33,120          485,127              75,873
7          100,000          29,108          414,235              75,873
8          100,000          24,854          339,089              75,873
9          100,000          20,345          259,434              75,873
10          275,000          15,566                       0              75,873


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