Question

Amusement Company leased equipment from General Robotics Company, beginning on January 1, 2017. The lease term is 5 years and requires equal rental payments of $60,493 at the beginning of each year of the lease (based on a 6% interest rate) starting on the commencement date (January 1, 2017). The equipment has a fair value at the commencement date of the lease of $300,000, a carrying value to General Robotics of $275,000, an estimated useful life of 5 years, and an estimated residual value of $40,000. The residual value is guaranteed by Smokey Finance. Therefore, this is a direct financing lease and the appropriate interest rate is 10.4%. Prepare General Robotics’ 2017 journal entries. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Answer 1

Date	Account Titles and Explanation	Debit	Credit
1-Jan-17	Lease Receivable	$342,465
	Unearned interest Revenue		$67,465
	Leased Assets		$275,000
	(Being Lease Recorded)
1-Jan-17	Cash	60,493
	Lease Receivable		60,493
	(Being Lease Rental received)
31-Dec-17	Unearned interest Revenue	21,584
	Interest revenue*		21,584
	(Being Finance Income Recognized)

Interest Income = (342465-67465-60493 )*10.4% = 21,584

Year	Lease Rental	PV Factor	Present value
0	60,493	1	60,493
1	60,493	0.9058	54,795
2	60,493	0.8205	49,635
3	60,493	0.7432	44,958
4	60,493	0.6732	40,724
5	40,000	0.6098	24,392
PV of Lease Rental			$274,996