Question

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

Answer 1

Note:

I have assumed the Depreciation as Streight Line Method with Salvage Value of 75,000.

Present Value of Lease Cashflow
	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

Amortization Table
	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

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)

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