In: Accounting
Amusement Company leased equipment from General Robotics Company, beginning on January 1, 2017. The lease term is 5 years and requires equal rental payments of $60,493 at the beginning of each year of the lease (based on a 6% interest rate) starting on the commencement date (January 1, 2017). The equipment has a fair value at the commencement date of the lease of $300,000, a carrying value to General Robotics of $275,000, an estimated useful life of 5 years, and an estimated residual value of $40,000. The residual value is guaranteed by Smokey Finance. Therefore, this is a direct financing lease and the appropriate interest rate is 10.4%. Prepare General Robotics’ 2017 journal entries. Must use factor table.
Given is a finance lease, because the life of lease is 5years and economic life of the asset is also 5 years.
Net investment in Lease = Gross Investment - Unearned finance income
Gross Investment = Minimum Lease payment + Guaranteed residual value + Unguaranteed residual value
= 302,465 + 40,000
= 342,465
Yr payment Discount factor Present Value
0 60,493 1 60,493
1 60,493 0.905 54,746
2 60,493 0.819 49,544
3 60,493 0.741 44,825
4 100,493 0.671 67,431
342,465 277,039
Unearned Finance Income = Gross Investment - PV of Gross Investment
= 342,465 - 277,039
= 65,426
LEASE AMORTISATION SCHEDULE
Yr Opening Balance Interest Expense Payment Principal Payment Closing Balance
0 277,039 - 60,493 60,493 216,546
1 $216,546 $22,737 $60,493 $37,756 178,790
2 $178,790 $18,773 $60,493 $41,720 137,070
3 $137,070 $14,392 $60,493 $46,101 90,969
4 $90,969 $9,524 $100,493 $90,969 0
JOURNAL ENTRIES :
January 1,2017
DR LEASE RECEIVABLE $277,039
CR MACHINERY $277,039
DR CASH $60,493
CR LEASE RECIEVABLE $60,493