Question

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 $28,900, payable at the beginning of each year.
•	The interest rate implicit in the lease is 12%.
•	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 $144,000, and the fair retail value is approximately $160,800.
•	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 $28,900 discounted at 12% is $160,792.58 (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.

Answer 1

It will be classified as Sale type Finance lease Transaction:- a. The lease term is for the major part of the economic life of the unbderlying asse, even if tittle is not transferred and in given cases lease term is 8year and economic life of Asset is also 8 year b. The Net Investment value is differ from carrying Value.					Ballieu Company
					Lease Amortization Schedule
					Date	Annual Lease Payment Received	Interest Revenue at 12% on Net Investment	Lease Receivable	Unearned Interest Leases	net Investment
Journal Entry in the books of Ballieu Company					01/01/2016			$231,200.00	$70,407.42	$160,792.58
Date	Account & Explanation	Debit	Credit		01/01/2016	$28,900.00		$202,300.00	$70,407.42	$131,892.58
01/01/2016	Lease Receivable	$231,200.00			31/12/2016	$28,900.00	$15,827.11	$173,400.00	$54,580.31	$118,819.69
	Cost of Goods Sold ($313000-$10388)	$144,000.00			31/12/2017	$28,900.00	$14,258.36	$144,500.00	$40,321.95	$104,178.05
	Sales		$160,792.58		31/12/2018	$28,900.00	$12,501.37	$115,600.00	$27,820.58	$87,779.42
	Unearned interest on Lease		$70,407.42		31/12/2019	$28,900.00	$10,533.53	$86,700.00	$17,287.05	$69,412.95
	Equipment		$144,000.00		31/12/2020	$28,900.00	$8,329.55	$57,800.00	$8,957.50	$48,842.50
	To Record Equipment taken on Lease				31/12/2021	$28,900.00	$5,861.10	$28,900.00	$3,096.40	$25,803.60
					31/12/2022	$28,900.00	$3,096.43	$0.00	-$0.04	$0.04
01/01/2016	Cash	$28,900.00
	Lease Receivable		$28,900.00
	To record Annual Lease Rent received
31/12/2016	Unearned interest on Lease	$15,827.11
	Interest revenue		$15,827.11
	To Recored interest Income
01/01/2017	Cash	$28,900.00
	Lease Receivable		$28,900.00
	To record Annual Lease Rent received
31/12/2017	Unearned interest on Lease	$14,258.36
	Interest revenue		$14,258.36
	To Recored interest Income