Question

Part 4: Lessee-Lessor Entries: Sales-Type Lease On January 1, 2018, Capital Corp. leased equipment to Hinton Corporation. The following information pertains to this lease. The term of the noncancelable lease is 12 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease. Equal rental payments are due on January 1 of each year, beginning in 2018. The fair value of the equipment on January 1, 2018, is $247,500, and its cost is $198,000. The equipment has an economic life of 16 years. Hinton depreciates all of its equipment on a straight-line basis. Capital set the annual rental to ensure a 6% rate of return. Hinton’s incremental borrowing rate is 4%, and the implicit rate of the lessor is unknown. Collectability of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

Prepare all the necessary journal entries for Hinton for 2018.

Prepare all the necessary journal entries for Capital for 2018.

Answer 1

• For Capitol and Hilton, it shall be a capital lease because of reasonable predicatbility of lease amount collection and the lease term is more than half of the assets economic life.
• Annual rental payment would be: ( Fair Value - PV of Unguaranted Residual Value) / PVA Factor
  • ($ 247,500 - 0) / 8.39 = $ 29,500

Prepare all the necessary journal entries for Hinton for 2018.

Date	Account titles and explanation	Debit($)	Credit($)	Calculations
1/1/2018	Lease equpment A/c Dr	$276,710		($29,500 * 9.38)
	To Lease liability A/c		$276,710
	(To record the lease)
	Lease liability A/c Dr	$29,500
	To cash A/c		$29,500
	(To record lease payment)
12/31/2018	Expense for depreciation A/c Dr	$23,059		($23,059 / 12)
	To Accumulated depreciation A/c		$23,059
	(To record depreciation)
	Expense for interest A/c Dr	$9,888		($276,710-29,500)*4%
	To Interest payable A/c		$9,888
	(To record interest)
Prepare all the necessary journal entries for Capitol for 2018.
Date	Account titles and explanation	Debit($)	Credit($)	Calculations
1/1/2018	Receivable lease A/c Dr	$247,500
	Cost of goods sold A/c Dr	$198,000
	To Sales A/c		$198,000
	To Inventory A/c		$198,000
	(To record the lease)
	Cash A/c Dr	$29,500
	To Receivable lease A/c		$29,500
	(To record lease payment)
12/31/2018	Interest receivable A/c Dr	$8,720		($247,500 - $29500)*4%
	To Interest income A/c		$8,720
	(To record interest)