Question

In: Accounting

Amusement Company leased equipment from General Robotics Company, beginning on January 1, 2017. The lease term...

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.

Solutions

Expert Solution

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


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