Question

Jayhawk Company leased a machine from Houston Leasing. The machine had a 5 year life. The lease was for three years and required three payments of $200,000 each made at the beginning of the year starting with January 1, 2017. The lease was non-cancellable, and title did not pass at the end of the lease. There was no bargain purchase right either. However, the present value of the minimum lease payments was greater than 90% of the fair value on January 1, 2017. The cost of the leased equipment to Houston was $450,000. Houston’s earning’s rate is 8%, and there is a guaranteed residual value of $20,000 at the end of year 3. The actual value at the end of year 3 was $15,000. Houston considers this lease a sale type lease.

On the books of Houston,

Prepare an amortization schedule of the lease receivable.

Record the inception of the lease on January 1, 2017 and the receipt of the first payment.

Record the last receipt from the lease and the return of the equipment.

Assume the lease was cancellable. Record the receipt of the second payment on January 1, 2018.

Answer 1

				Houstan Company
				Lease Amortization Schedule
	a. Computation of Net Investment			Date	Lease Payment Received	Interest Revenue at 8% on Net Investment	Lease Receivable	Unearned Interest Leases	net Investment
	Annual Rental	$200,000		01/01/2017			$620,000	$47,470	$572,530
	Cumm PVF @8% for 3 Year	2.783265		01/01/2017	$200,000		$420,000	$47,470	$372,530
	Present Value of Lease rental (a)	$556,653.00		01/01/2018	$200,000	$29,802.40	$220,000	$17,668	$202,332
	Present Value of Gurrented Residual Value ($20000*0.793832) (b)	$15,877.00		01/01/2019	$200,000	$16,186.59	$20,000	$1,481	$18,519
	Net Investment/ Present value of Lease (a+b)	$572,530.00		01/01/2019	$20,000	$1,481.52	$0	-$1	$1
	Gross Lease Receivable/ Gross Investment ( $200000*3+20000)	$620,000
Journal Entry in the books of Houston Company
Date	Account & Explanation	Debit	Credit
01/01/2017	Lease Receivable	$620,000.00
	Cost of Goods Sold	$450,000.00
	Sales		$572,530.00
	Unearned interest on Lease		$47,470.00
	Equipment -ASS		$450,000.00
	To Record Sale , Lease Receivable and Uneraned Interest
01/01/2017	Cash	$200,000.00
	Lease Receivable		$200,000.00
	To record Lease Payment Recevied
31/12/2017	Unearned Interest on Lease	$29,802.40
	Interest Revenue		$28,300.00
	To Record First Lease Interets Revenue
01/01/2018	Cash	$200,000.00
	Lease Receivable		$200,000.00
	To record Lease Payment Recevied
01/01/2019	Cash	$200,000.00
	Lease Receivable		$200,000.00
	To record Lease Payment Recevied
01/01/2019	Unearned Interest on Lease	$1,481.52
	Interest Revenue		$1,481.52
01/01/2019	Cash	$20,000.00
	Lease Receivable		$20,000.00
	To Record received of Gurrentee Residual payment