Determining Type of Lease and subsequent Accounting

Ravis Rent-A-Car Company leases a car to IRA Reem, an employee, on January1,2013. The term of the noncancelable lease is 4 years. The following information about the lease is provided:

1. Title to the car passes to IRA on the termination of the lease with no additional payment required by the leasee.

2. The cost and fair market value of the car to the Ravis rent-A-Car is $8,400. The car has an ecomonic of 5 years.

3. The lease payments are determined at an amount that will yield Ravis rent-A-Car a rate of return of 10% on its net investment.

4. Collectibility of the leaseayment is reasonable assured.

5. There are no important uncertainties surrounding the amount of unreinbursable costs yet to be incurred by the lessor.

6. Equal annual lease payments are due at the end of each year.

1.Determine if the lease is an operating, sales-type, or direct financing lease from Ravis Rent-A-Car's point of view.

Application of criteria for Determination

of Lease Classication from Lessor's Viewpoint

Capitalization Criteria

1. Transfer of ownership at end of lease

2. bargain purchase option

3. Lease term is 75% or more of ecomonic life

4. Present value of lease payments nis 90% or more of fair value

Rrecognition Criteria

1. Collectibility assured

2. No uncertainities

2. Prepare a table summerizing the lease receipts and interest revenue earned by the Ravis Rent-A-Car for the 4-year numbers. If required, round your answers to the

nearest cent. If an amount is zero, enter "0".

Ravis Rent-A-Car

Lease Receipts and Interest Revenue summary

2013-2016

Annual Lease Interest Revenue Amount of Net Lease

Payments at 10% on Net Investment Receivable

January 1,2013 Investment Recovered

December 31, 2013

December 31,2014

December 31,2015

December31, 2016

3. Prepare the journal entries for 2013 and 2014 to record the lease agreement, the lease receipts, and the recognition of income on the book of ravis rent-A-Car. For compound entries, if an amount box does not require an entry, leave it blank.

2013 Jan 1 Automobile held for Lease

Purchase Cash

Auto

Record lease: Lease receivable

Automibile Held for lease

Unearned Interest:Leases

Dec. 31 Cash

Receive payment Lease Receivable

Interest Revenue Unearned interest: Leases

Interest Revenue: Leases

2014 Dec. 31

Receive Payment Cash

Lease receivable

Interest Revenue Unearned Interest: Leases

Interest Revenue:Leases

Purchase Auto

Received Investment recovered