Question
Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and
Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. 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 directly to a third party. |
4. | The interest rate implicit in the lease is 14%. |
5. | The initial direct costs are insignificant and assumed to be zero. |
6. | It is probable that Edom will collect the lease payments. |
Required:
1. | Next Level Assuming that the lease is a sales-type lease from Edoms point of view, calculate the selling price. |
2. | Prepare a table summarizing the lease receipts and interest income earned by Edom. |
3. | Prepare a table showing the accretion of the unguaranteed residual asset. |
4. | Prepare journal entries for Edom, the lessor, for the years 2019 and 2020. |
4a. Prepare journal entries for Edom, the lessor, for the year 2019.
General Journal Instructions
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GENERAL JOURNAL
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Check My Work
For a sales-type lease, the lessor recognizes a sale and receivable at the present value of the lease payments. The cost of goods sold amount is the underlying asset less the unguaranteed residual asset which is recorded at the present value amount and increased over the lease term. Use the amounts on the Analysis page to record the interest and accretion entries.
Record two entries rather than a compound entry for the sale and cash receipt on January 1 and two entries on December 31 to record interest income.
4b. Prepare journal entries for Edom, the lessor, for the year 2020.
Question not attempted.
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GENERAL JOURNAL
Score: 0/76
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