Question

Windsor Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $262,268, and its unguaranteed residual value at the end of the lease term is estimated to be $21,400. National will pay annual payments of $36,200 at the beginning of each year. Windsor incurred costs of $177,800 in manufacturing the equipment and $4,400 in sales commissions in closing the lease. Windsor has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 9%.
1. Compute the amount of each of the following items.聽(Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 5,275.)
(1) Lease receivable $
(2) Sales price $
(3) Cost of sales
2. Prepare a 10-year lease amortization schedule for Windsor, the lessor. (Round answers to 0 decimal places e.g. 5,275.)
3. Prepare all of the lessor’s journal entries for the first year. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 5,275.)

Answer 1

(1) Lease receivable $ 36200*6.99525= 253228.05 (P/A, 9%,10)

(2) Sales price ( PV of minimum lease payments-PV of Residual Value) 253228.1-7608.34= 245619.71

(3) Cost of sales ----(Cost-PV of Residual Value ) 177800-7608.34 = 170191.66 (P/F, 9%,10)

2.10-year lease amortization schedule for Windsor, the lessor
Year	Annuity	Tow. Int.	Tow. Princ.	Principal balance
				253228.05
1	36200	0	36200	217028.05
2	36200	19532.52	16667.48	200360.57
3	36200	18032.45	18167.55	182193.03
4	36200	16397.37	19802.63	162390.40
5	36200	14615.14	21584.86	140805.53
6	36200	12672.5	23527.5	117278.03
7	36200	10555.02	25644.98	91633.06
8	36200	8246.975	27953.03	63680.03
9	36200	5731.203	30468.8	33211.23
10	36200	2989.011	33210.99	0.24

3. Lessor's Journal Entries
Account Title	Debit	Credit
Lease receivable	253228.05
COGS	170191.66
Sales		245619.71
Inventory		177800
(to record inception)	423419.71	423419.71
Sales Commission	4400
Cash		4400
(Sales Commission)
Cash	36200
Lease receivable		36200
(Initial Lease instalment recd.)
Interest Receivable	19532.52
Interest Income		19532.52
(253228.05-36200)*9%
(to accrue interest income)