Question

Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.

1.	The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey.
2.	The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.
3.	The discount rate is 10%, which is implicit in the lease. Garvey knows this rate.
4.	The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000.
5.	The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets.

Required:

Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of $200,000. ​

** NOTE: the cost of goods sold is not 50,000!!! The following is correct.

GENERAL JOURNAL

Score: 84/88

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	jan.1 ✔	✔Lease Receivable		✔250000
2		Sales Revenue✔			✔250000
3	✔Jan. 1	✔Cost of Goods Sold
4		✔Equipment Leased to Others
5	✔Dec. 31	✔Cash		✔65949.37
6		✔Lease Receivable			✔40949.37
7		✔Interest Income			✔25000

Answer 1

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Ans: Amount in $ In the Bookl of Richie compony * Journal Entry: Account Title Debit Lease Receivable $ 250000 Sales Revenue $250.000 are i Credit Jan-1 Jan-1 $200000 Cost of Goods sold wote-l) Equipment leased to others $200000 Dec-31 - Cash $ 65,949:37 Lease Receivable $ 40,949:37 $ 25000 Interest income (250000 x 104) Note-t : mentioned cast of $200000 is the cost of Goods sold.

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