Question

Rambler Company leased a machine from Basket Leasing Company. The lease is for 4 years. The life of the asset is 5 years. The terms of the lease require 4 payments of $100,000 at the beginning of the year, beginning on January 1, 2017. Rambler does not know Basket’s rate. There is an unguaranteed residual value of $15,000 at the end of year 4. At the end of year 4, the equipment is worth $12,000. Rambler also assumes property tax expense of $1,000 per year paid to Basket. The lease is a direct financing lease.

On the books of Baskets,

A.) Prepaer an amortization schedule for the lease receivable.

B.) Record the inception of the lease ans receipt of the first payment on January 1, 2017

C.) Record that last payment in year 4 and the return of the equipment

Answer 1

Unguranteed residula value is laways deducted from minimum lease payemnts.

At the start of lease contract:

Lease Rent =100000-15000=$85000

Lease receivable $85000

To Asset $85000

At the time of first payment

Cash Account debit $85000

To Lease receivable $85000

	Rent per year
1	85,000.00
2	85,000.00
3	85,000.00
4	85,000.00
	Cost	Depriciation	Net value
0	85,000.00	14,600.00	70,400.00
1	70,400.00	14,600.00	55,800.00
2	55,800.00	14,600.00	41,200.00
3	41,200.00	14,600.00	26,600.00
4	26,600.00	14,600.00	12,000.00

Depriciation per year=Costs-salvage-residual value/useful life in years.

100000-12000-15000/5=14600 per year.