Question

Terms of a lease agreement and related facts were as follows: a. Incremental costs of commissions for brokering the lease and consummating the completed lease transaction incurred by the lessor were $4,145. b. The retail cash selling price of the leased asset was $504,000. Its useful life was three years with no residual value. c. The lease term was three years and the lessor paid $504,000 to acquire the asset. d. Annual lease payments at the beginning of each year were $188,898. cit rate when calculating annual rental payments was 13%. (FV of $1, PV of $1, FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare the appropriate entries for the lessor to record the lease and related payments at its beginning, January 1, 2021. 2. Calculate the effective rate of interest revenue after adjusting the net investment by initial direct costs. 3. Record any entry(s) necessary at December 31, 2021, the fiscal year-end. (Prepare any entry(s) recorded by the lessor at December 31, 2021, its fiscal year-end.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Prepare the appropriate entries for the lessor to record the lease and related payments at its beginning, January 1, 2021. (Round your intermediate and final answers to the nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list

Answer 1

Answer :-

Required 1 -

Appropriate entries for the lessor to record the lease and related payments at January 1, 2021 are as follows -

Date	Particular	Debit	Credit
1/1/21	Lease Receivable A/c Dr.	$504,000
	To Equipment A/c		$504,000
	(To record the lease)
1/1/21	Lease Receivable A /c Dr.	$4,145
	To Cash A/c		$4,145
	(To record the payment of initial directs costs)
1/1/21	Cash A/c Dr.	$188,898
	To Lease Receivable A/c		$188,898
	(To record cash received)

Required 2 -

The Effective rate of interest revenue after adjusting the net investment by initial directs costs are as follows :-

Present value of leased assets = Selling Price of leased assets + Initial direct costs

Present value of leased assets = $504,000 + $4,145

Present value of leased assets = $508,145

Annual lease payment at the beginning of each year = $188,898

No. Of lease payment = 3 years

Effective rate = ?

Present value of leased asset / Present value of annuity due = Annual lease payment

$508,145 / Present value of annuity due = $188,898

Present value of annuity due = $508,145 / $188,898

Present value of annuity due = 2.69005

As per table of Present value of annuity due of 2.69005 is 12%.

Effective rate of interest is 12%.

Required 3 -

Journal entry necessary at December 31, 2021 are as follows:-

Date	Particular	Debit	Credit
31/12/21	Interest receivable A/c Dr.	$38,309.64
	To Interest revenue A/c		$38,309.64
	(To record interest receivable)

Interest receivable = (Present value of lease assets - Annual lease payment)

Interest receivable = ($508,145 - $188,898) × 12%

Interest receivable = $38,309.64