Question

On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $963,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2022, will be $307,000. Negotiations led to the lessee guaranteeing a $354,000 residual value.

Equal payments under the finance/sales-type lease are $207,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 5% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Prepare the following entries for both Karrier and Allied on January 1, 2018, to record the lease.

1.Record the beginning of the lease for Karrier.

2.Record the beginning of the lease for Allied.

Prepare the following entries for both Karrier and Allied on December 31, 2018, related to the lease.

1. Record the lease and interest payment for Karrier.

2. Record the amortization of right-to-use asset for Karrier.

3. Record the lease revenue and interest received by Allied.

Answer 1

Computation of Fair Value of Leased Asset
Annual Lease Payment	$207,000.00
Cumm PVAF @ 5%   for 4 Year	3.546
Cumm Lease payment in 4 year (A)	$734,022.00
Gurrented Residual value	$354,000.00
Present value @ 5% at end of Four year	0.8227
Prsent Value of Gurrented residual value (B)	$291,235.80
Fair Value of Lease Asset ( A+B)	$1,025,257.80
In the Books of Allied Industries Date Account Title & Description Debit Credit 01.01.2018 Lesser Recivable $1,025,258.00 High performance Conveyor $1,025,258.00 ( Being Asset give on lease) 31.12.2018 Cash $207,000.00 Interest Revenue ($1025258*5%) $51,263.00 Lease Receivable $155,737.00 ( Being Installment & Interest received) In The Books of Karrier Company Date Account Title & Description Debit Credit 01.01.2018 Leased Asset- Conveyor $1,025,258.00 Lease Payable $1,187,442.00 Being Asset taken on Lease 31.12.2018 Leased Payable $155,737.00 Interest Expense $51,263.00 Cash $207,000.00 ( Being Installment and Interest Paid) 31.12.2018 Depreciation Expense $131,200.00 Accumulated Depreciation $131,200.00 ( being Depreciation Booked, ($963000-$307000)/5 Year)