Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $50,000 to be made at the end of each year.2. The equipment costs $130,000. The equipment has an estimated life of 4 years and an estimated residual value at the end of the lease term of zero.3. Fox agrees to pay all executory costs.4. The interest rate implicit in the lease is 12%.5. The initial direct costs are insignificant and assumed to be zero.6. 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.

Required:

1. Next LevelDetermine if the lease is a sales-type or direct financing lease from Berne's point of view (calculate the selling price and assume that this is also the fair value).

2. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.

3. Prepare journal entries for Berne, the lessor, for the years 2016 and 2017.

CHART OF ACCOUNTS

Berne Company

General Ledger

ASSETS

111 Cash

121 Accounts Receivable

122 Lease Receivable

141 Inventory

152 Prepaid Insurance

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

Calculate the selling price and assume that this is also the fair value. Additional Instruction

$

Berne Company

Lease Payments Received and Interest Revenue Earned Summary

2016 - 2019

1Date/Annual Lease Payment Received/Interest Revenue at 12% on Net Investment/Amount of Net Investment Recovered/Lease Receivable/Unearned Interest: Leases/Net Investment

2January 1, 2016

3December 31, 2016

4December 31, 2017

5December 31, 2018

6December 31, 2019

Prepare journal entries for Berne, the lessor, for the years 2016 and 2017

GENERAL JOURNAL

DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT

1

2

3

4

5

6

7

8

9