Problem 5

On Jan 1, 20x1, Kaiser Financing acquired bottling equipment for $900,000, and immediately leased it to Fonda Drinks. The lease would last 8 years , commencing immediately on Jan 1, 20x1 and required Fonda Drinks to make 8 equal annual lease payments, each to be made at the beginning of the year. The bottling equipment was estimated to have a useful life of 8 years.

Kaiser financing wished to earn an 8% return (before taxes) on the lease arrangement, expected the asset to be worth $20,000 (unguaranteed by Fonda Drinks) when returned after 8 years, and set the annual lease payment accordingly. Kasier financing had a Dec 31 fiscal year-end.

1. What was the annual lease payment?
2. Prepare the journal entries that Kaiser financing would make in 20x1 and 20x2 for the lease.
3. Prepare the journal entries that Kasier financing was to make at the end of the lease term when the leased asset was returned and sold for mere $6,000