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MSG is a manufacture company which produce automobile. At the beginning of 2010, MSG leases ten automobile to FD under a six-year non-cancellable lease agreement.

MSG is a manufacture company which produce automobile. At the beginning of 2010, MSG leases ten automobile to FD under a six-year non-cancellable lease agreement. Information about the lease and the automobile is:

1. Equal annual payments that are due on January 1 each year provide MSG 7% return on net investment (present value factor for 6 periods at 7% is 5.1002).

2. Titles to the automobile pass to FD at the end of the lease.

3. The fair value of each automobile is $35,000. The cost of each car to MSG is $32,000. Each car has an expected useful life of 8 years. No residual value guarantee.

4. Collectability of the lease payments is probable.

a) What type of lease is this for the lessor? Explain.

b) Calculate the annual lease payment for company.

c) Prepare a lease amortization table with dates for MSG for the first three years.

d) Find out the journal entries for the lessor in 2010 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue.


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