Question
Exercise 3. Lessee (Finance Lease) and Lessor (Sales-Type Lease) On 1/1, Year 1, a lessee engages in a finance lease with a lessor who accounts
Exercise 3. Lessee (Finance Lease) and Lessor (Sales-Type Lease)
On 1/1, Year 1, a lessee engages in a finance lease with a lessor who accounts for the lease as sales-type lease. The lease is an annuity due lease for 10 years. The annual lease payments are $20,000. The first annual lease payment of $20,000 is on 1/1, Year 1, and the remaining payments are on 12/31 (i.e., the second annual lease payment is on 12/31, Year 1.) There is $8,000 guaranteed residual value. The interest rate implicit in the lease, which the lessee is aware of is 8%, thus a present value factor of an annuity due of 7.2469 and the present value of a single sum 0.4631.
The fair market value and cash selling price of the equipment is $148,643, which is also the present value of the minimum lease payments for the lessee and the net investment for the lessor. The inventory carrying value of the equipment on the lessors books is $70,000. Round to the nearest whole dollar.
Prepare the amortization table shown below for the first three years of the lease and the journal entries for the lessee and lessor on the following pages for the dates indicated.
Date | Lease payment | Interest Expense or Interest Revenue | Amortization | Carrying value of lease liability and net investment |
1/1/Yr 1 |
|
|
| $ |
1/1/Yr 1 | $ |
| $ | $ |
12/31/Yr 1 | $ | ($_________ X ___ = ) $_________ | $ | $ |
12/31/Yr 2 | $ | ($_________ X ___ = ) $_________ | $ | $ |
12/31/Yr 3 | $ | ($_________ X ___ = ) $_________ | $ | $ |
Check figures: Note that unlike the previous exercise the payments and the recognition of interest all occur on 12/31 of each year. There is no payment on 1/1 of each year and thus no journal entry on 1/1 either. The carrying value of lease obligation on 12/31, Year 3, should be $97,125.
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