Sub Zero, Inc., an equipment manufacturer, leased a freezer to Commercial Kitchen Company on January 1, 2019. The lease is for a 6-year period and requires equal annual payments of $42,061.33 at the beginning of each year.
The first payment is received on January 1, 2019. Sub Zero manufactured the freezer in late 2018 and has carried it in finished goods inventory at a cost of $162,500. Collectability of lease payments is reasonably predictable, and no important uncertainties surround the number of costs yet to be incurred by Sub Zero.
Sub Zero set the annual rental to ensure an 8% rate of return. The freezer has an economic life of 8 years with no residual value and reverts back to Sub Zero at the termination of the lease.
Required:
(a) Compute the amount of lease receivable; round to the nearest whole dollar.
(b) Prepare all necessary journal entries on Sub Zero’s books for 2019 and 2020; again, round to the nearest whole dollar.