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

CHART OF ACCOUNTS Berne Company General LedgerASSETS111Cash121Accounts Receivable122Lease Receivable141Inventory152Prepaid Insurance

LIABILITIES211Accounts Payable231Salaries Payable250Unearned Interest261Income Taxes Payable

EQUITY311Common Stock331Retained Earnings

REVENUE411Sales Revenue431Interest Revenue: Leases

EXPENSES500Cost of Asset Leased511Insurance Expense512Utilities Expense521Salaries Expense532Bad Debt Expense540Interest Expense541Depreciation Expense559Miscellaneous Expenses910Income Tax Expense

Next Level

Determine 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?

Additional Instruction

Analysis

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

Berne Company

Lease Payments Received and Interest Revenue Earned Summary

2016 - 2019

1

Date

Annual Lease Payment Received

Interest Revenue at 12% on Net Investment

Amount of Net Investment Recovered

Lease Receivable

Unearned Interest: Leases

Net Investment

2

January 1, 2016

3

December 31, 2016

4

December 31, 2017

5

December 31, 2018

6

December 31, 2019

General Journal

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

PAGE 2016PAGE 2017

GENERAL JOURNAL

DATEACCOUNT TITLEPOST. REF.DEBITCREDIT1

2

3

4

5

6

7

8

9