Question
Eastern Leasing is an equipment dealer that sometimes uses leasing as a means to sell its products. On January 1, 2017, Eastern Leasing leased equipment
Eastern Leasing is an equipment dealer that sometimes uses leasing as a means to sell its products. On January 1, 2017, Eastern Leasing leased equipment to NorthCo. The lease term was 4 years with annual lease payments of $5,854 to be paid each December 31. The equipment has an estimated zero residual value at the end of the lease term. The equipment was carried in Eastern Leasing's accounts at a cost of $30,000. Eastern Leasing expects to collect all rentals from NorthCo, and there were no material cost uncertainties at the inception of the lease. The implicit interest rate in the lease was 12%. Please make sure your final answer(s) are accurate to 2 decimal places
a) Calculate the NPV of the lease payments
b) Prepare the lessor's amortization schedule.
| Year | Payment | Interest 12% | Principal | Balance |
| Jan 1 2017 | ||||
| 2017 | ||||
| 2018 | ||||
| 2019 | ||||
| 2020 | ||||
| Totals |
c) Calculate the profit/(loss) at the inception of the lease.
d) Prepare the journal entries for the lessor for 2017. Enter an appropriate description when entering the transactions in the journal. Dates must be entered in the format dd/mmm (ie. January 15 would be 15/Jan).
| Date | Account | Debit | Credit |
| 1/Jan | Lease receivable | ||
| COGS | |||
| Sales Revenue | |||
| Inventory | |||
| Unearned interest income | |||
| 31/Dec | Cash | ||
| Lease receivable | |||
| 31/Dec | Unearned interest income | ||
| Interest income | |||
e) Assume now that the residual value was $1,000, not guaranteed by the lessee, and that the leased equipment had a fair value of $14,010 and a cost to the lessor of $12,000 at the time of the lease agreement. Calculate the annual lease payment for the lessor and the present value of the minimum lease payments to the lessee.
| Lessor annual lease payment | |
| Lessee |
f) Referring to part e), prepare the journal entries for the lessor for 2017. Enter an appropriate description when entering the transactions in the journal. Dates must be entered in the format dd/mmm (ie. January 15 would be 15/Jan)
| Date | Account | Debit | Credit |
| 1/Jan | Lease receivable | ||
| COGS | |||
| Sales Revenue | |||
| Inventory | |||
| Unearned interest income | |||
| 31/Dec | Cash | ||
| Lease receivable | |||
| 31/Dec | Unearned interest income | ||
| Interest income | |||
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Financial Accounting an introduction to concepts, methods and uses
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
13th Edition
978-0538776080, 324651147, 538776080, 9780324651140, 978-0324789003
