3. (LESSOR ENTRIES FOR FINANCING LEASE WITH A GUARANTEED RESIDUAL)

The following facts pertain to a non-cancelable lease agreement between Ace Leasing Company and King Company, a lessee.

Commencement of Lease Date January 1, 2020

Annual lease payment due at the beginning of the year beginning with January 1, 2020 $137,171

Residual value of equipment at end of lease term, guaranteed by lessee $54,000

Book Value of Lease Equipment on LESSOR books $500,000

Lease term 6 years

Economic life of leased equipment 7 years

Fair Value of asset at January 1, 2020 $659,000

Lessors Implicit Rate 12% Lessees incremental borrowing rate 12%

The asset will revert to the lessor at the end of the lease term. You examined this lease from the Lessee prospective in problem #1. Based on the tests you found it was a financing lease. In this problem you will complete the LESSOR entries. You do not need to redo the tests it is still a financing lease with a guaranteed residual

A. Prepare the entry on the Lessors book to record this Lease on 1/1/2020. You will need to compute the Lease Receivable debit, the CGS debit, the Equipment credit and the Sale Revenue credit to complete the entry.

B. Complete the entry to receive the first rental payment on 1/1/2020.

C. Prepare the interest revenue amortization schedule for the first two years and prepare the interest revenue entry for 12/31/2020.