Journal Entries for a Sales-Type Lease-Lessor

On January 1, the lessor company purchased a piece of equipment for $7,000 as inventory. The lessor company immediately leased the equipment under a sales-type lease agreement; the cash selling price of the equipment is $10,000. The lease calls for the lessor company to receive five annual lease payments of $2,600 per year, to be received at the beginning of the year. The interest rate implicit in the lease is 15%.

Note: Use the net method to record lease payment receivables.

1. Make the journal entries necessary on the books of the lessor company to record (a) the lease signing, (b) the cost of the inventory, and (c) the receipt of the first lease payment.

2. Make the journal entry necessary on the books of the lessor company to record the recognition of interest revenue at the end of the first year.