Determining Type of Lease and Subsequent Accounting

Instructions

Chart of Accounts

Next Level

General Journal

Instructions

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 $34,500, payable at the beginning of each year.
	The interest rate implicit in the lease is 11%.
	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 $137,000, and the fair retail value is approximately $197,100.
	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 $34,500 discounted at 11% is $197,070.76 (the $1 purchase option is ignored as immaterial).

Required:

1.	Next Level Identify the classification of the lease transaction from Ballieus point of view.
2.	Prepare all the journal entries for Ballieu for the years 2016 and 2017.

Chart of Accounts

CHART OF ACCOUNTS

Ballieu Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
122	Lease Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
198	Accumulated Depreciation

	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

Next Level

Determine what type of lease this is for Ballieu.

Criteria	Met
Transfer of ownership at end of lease
Bargain purchase option
Lease term is 75% or more of economic life
Present value of lease payments is 90% or more of fair value

Determine what type of lease this is for Ballieu.

General Journal

Prepare all the journal entries for Ballieu for the years 2016 and 2017. Additional Instructions

PAGE 2016PAGE 2017

GENERAL JOURNAL

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