Exercise 21-7

On January 1, 2017, Splish Company leased equipment to Blossom Corporation. The following information pertains to this lease.

1.		The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2.		Equal rental payments are due on January 1 of each year, beginning in 2017.
3.		The fair value of the equipment on January 1, 2017, is $188,000, and its cost is $150,400.
4.		The equipment has an economic life of 8 years, with an unguaranteed residual value of $8,000. Blossom depreciates all of its equipment on a straight-line basis.
5.		Splish set the annual rental to ensure an 11% rate of return. Blossoms incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.
6.		Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

(Both the lessor and the lessees accounting period ends on December 31.)

(A)Calculate the amount of the annual rental payment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) The amount of the annual rental payment $___________

(B)Prepare all the necessary journal entries for Blossom for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Date	Account Titles	Debit	Credit
1/1/17		??
			??
	(to record the lease)
		??
			??
	(to record lease payment)
12/31/17		??
			??
	(to record depreciation)
		??
			??
	(to record interest)

(C)Prepare all the necessary journal entries for Splish for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

DAte	Account Titles	Debit	Credit
1/1/17
	(to record the lease)
	(to record lease payment)
12/31/17
	(to record interest)

Attached are list of accounts

Accounts Payable Accumulated DepreciationBuilding Accumulated DepreciationCapital Leases Accumulated DepreciationEquipment Airplanes Buildings Cash Cost of Goods Sold Depreciation Expense Equipment Executory Costs Executory Costs Payable Insurance Expense Interest Expense Interest Payable Interest Receivable Interest Revenue Inventory Land Leased Buildings Leased Equipment Leased Land Lease Liability Lease Receivable Loss on Capital Lease Machinery Maintenance and Repairs Expense No Entry Prepaid Lease Executory Costs Property Tax Expense Property Tax Payable Rent Expense Rent Payable Rent Receivable Rent Revenue Revenue from Sale-Leaseback Salaries and Wages Expense Sales Revenue Selling Expenses Trucks Unearned Profit on Sale-Leaseback Unearned Service Revenue