Question
On January 1, 2020, Blossom Company leased equipment to Flynn Corporation. The following information pertains to this lease. 1. The term of the non-cancelable lease
On January 1, 2020, Blossom Company leased equipment to Flynn Corporation. The following information pertains to this lease.
1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $3,000, while the expected residual value at the end of the lease is $7,000.
2. Equal rental payments are due on January 1 of each year, beginning in 2020.
3. The fair value of the equipment on January 1, 2020, is $140,000, and its cost is $90,000.
4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.
5. Blossom set the annual rental to ensure a 7% rate of return. Flynn's incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments by the lessor is probable.
Both the lessor and the lessee's accounting periods end on December 31.
Click here to view factor tables.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
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(a)
Correct answer. Your answer is correct.
Discuss the nature of this lease to Blossom and Flynn.
The nature of this lease for Blossom is a Entry field with correct answer
sales-type
lease.
The nature of this lease for Flynn is a Entry field with correct answer
finance
lease.
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(b)
Incorrect answer. Your answer is incorrect.Try again.
Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.)
Annual rental payment $Entry field with incorrect answer
90,000
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(c)
all the necessary journal entries for Blossom for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)
Date Account Titles and Explanation Debit credit
1/1/20 Lease Receivable 140,000
Cost of Goods Sold 90,000
Sales Revenue 140,000
Inventory 90,000
(To record the lease)
1/1/20 Cash 27,058
Lease Receivable 27,058
(To record lease payment)
12/31/20 Lease Receivable 7,906
Interest Revenue 7,906
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(d)
Suppose the collectibility of the lease payments was not probable for Blossom. Prepare the necessary journal entry for the company in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
Date Account Titles and Explanation Debit Credit
1/1/20
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