Question

Determining Type of Lease and Subsequent Accounting

Instructions

Chart of Accounts

Next Level

General Journal

Instructions

On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

•	The lease is noncancelable and has a term of 8 years.
•	The annual rentals are $34,500, payable at the beginning of each year.
•	The interest rate implicit in the lease is 11%.
•	Anderson agrees to pay all executory costs and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2024.
•	The cost of the equipment to the lessor is $137,000, and the fair retail value is approximately $197,100.
•	The lessor incurs no material initial direct costs.
•	The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
•	The lessor estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

The lessor calculates that the present value on January 1, 2016 of 8 annual payments in advance of $34,500 discounted at 11% is $197,070.76 (the $1 purchase option is ignored as immaterial).

Required:

1.	Next Level Identify the classification of the lease transaction from Ballieu’s point of view.
2.	Prepare all the journal entries for Ballieu for the years 2016 and 2017.

Chart of Accounts

CHART OF ACCOUNTS
Ballieu Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Interest 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue 431 Interest Revenue: Leases EXPENSES 500 Cost of Asset Leased 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

Next Level

Determine what type of lease this is for Ballieu.

Criteria	Met
Transfer of ownership at end of lease
Bargain purchase option
Lease term is 75% or more of economic life
Present value of lease payments is 90% or more of fair value

Determine what type of lease this is for Ballieu.

General Journal

Prepare all the journal entries for Ballieu for the years 2016 and 2017. Additional Instructions

PAGE 2016PAGE 2017

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9

Answer 1

QUESTION 1

According to Ballieu's point of view, the lease transaction is "Financial Lease". Financial lease is the lease where the leasor transfer substantially all the risk and reward related of the asset to the lessee. Generally, the ownership is transferred to the lessor at the end of the economic life of asset.

QUESTION 2

Journal entries

Date	Account Title	Dr Amount ($)	Cr Amount($)
01-Jan-19	Lease Receivable A/c Dr	1,97,070.76
	To Asset A/c		1,97,070.76
01-Jan-19	Cash A/c Dr	34,500
	To Lease receivable A/c		30,705
	To Financial income A/c		3,795
01-Jan-20	Lease Receivable A/c Dr	1,66,365.76
	To Asset A/c		1,66,365.76
01-Jan-20	Cash A/c Dr	34,500
	To Lease receivable A/c		30,705
	To Financial income A/c		3,795
01-Jan-21	Lease Receivable A/c Dr	1,35,660.76
	To Asset A/c		1,35,660.76
01-Jan-21	Cash A/c Dr	34,500
	To Lease receivable A/c		30,705
	To Financial income A/c		3,795
01-Jan-22	Lease Receivable A/c Dr	1,04,955.76
	To Asset A/c		1,04,955.76
01-Jan-22	Cash A/c Dr	34,500
	To Lease receivable A/c		30,705
	To Financial income A/c		3,795
01-Jan-23	Lease Receivable A/c Dr	74,250.76
	To Asset A/c		74,250.76
01-Jan-23	Cash A/c Dr	34,500
	To Lease receivable A/c		30,705
	To Financial income A/c		3,795
01-Jan-24	Lease Receivable A/c Dr	43,545.76
	To Asset A/c		43,545.76
01-Jan-24	Cash A/c Dr	34,500
	To Lease receivable A/c		30,705
	To Financial income A/c		3,795
01-Jan-25	Lease Receivable A/c Dr	12,840.76
	To Asset A/c		12,840.76
01-Jan-25	Cash A/c Dr	34,500
	To Lease receivable A/c		30,705
	To Financial income A/c		3,795
01-Jan-26	Lease Receivable A/c Dr	1
	To Asset A/c		1