Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1. The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year.2. The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom.3. Davis agrees to pay all executory costs.4. The interest rate implicit in the lease is 14%.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 Edom'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 Edom, the lessor, for the years 2016 and 2017.

CHART OF ACCOUNTS

Edom 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

559 Miscellaneous Expenses

910 Income Tax Expense

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

$

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

If an amount is zero, enter "0".

Round your answers to the nearest cent and use the rounded answers in subsequent computations.

Enter all amounts as positive numbers.

Question not attempted.

Score: 0/54

Edom Company

Lease Payments Received and Interest Revenue Earned Summary

2016 - 2020

1

Date

Annual Lease Payments Received

Interest Revenue at 14% on Net Investment

Lease Receivable

Unearned Interest: Leases

Net Investment

2

January 1, 2016

3

January 1, 2016

4

December 31, 2016

5

January 1, 2017

6

December 31, 2017

7

January 1, 2018

8

December 31, 2018

9

January 1, 2019

10

December 31, 2019

11

January 1, 2020

12

December 31, 2020

Solution

Edom Company

Lease Payments Received and Interest Revenue Earned Summary

2016 - 2020

1 Date Annual Lease Payments Received Interest Revenue at 14% on Net Investment Lease Receivable Unearned Interest: Leases Net Investment

2January 1, 2016

3January 1, 2016

4December 31, 2016

5January 1, 2017

6December 31, 2017

7January 1, 2018

8December 31, 2018

9January 1, 2019

10December 31, 2019

11January 1, 2020

12December 31, 2020

GENERAL JOURNAL

DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT

1

2

3

4

5

6

7

8

9

GENERAL JOURNAL

DATE ACCOUNT TITLEPOST. REF. DEBIT CREDIT

1

2

3

4