Question

P 15-13 Lessee and lessor; lessee guaranteed residual value LO15-2. LO15-6 On January 1, 2021, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $956,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2025, will be $300,000. Negotiations led to the lessee guaranteeing a $340,000 residual value. Equal payments under the finance/sales-type lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Karrier is aware that Allied used a 5% interest rate when calculating lease payments. Required: 1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2021, to record the lease. Prepare all appropriate entries for both Karrier and Allied on December 31, 2021, related to the lease.

Answer 1

According to the requirement of the question, we have to record journal entries.

Requirement 1:- Prepare the appropriate entries for both Karrier and Allied on January 1, 2021 to record the lease.

Solution:

No	Date	General Journal	Debit ($)	Credit ($)
1.	January 1, 2021	Right-of-use assets (Working Note 1)	$742,098
		Lease Payable		$742,098
2.	December 31, 2021	Lease Receivable (Working Note 2)	$988,908
		Cost of Goods Sold (given)	$956,000
		Equipment		$956,000
		Sales Revenue		$988,908

Working Note:-

1.Calculation of present value of lease payments for lessee

Present value of periodic lease payment ($200,000 * 3.54595)	$709,190
Add: Present value of the excess lessee ($40,000 * 0.82270)	$32,908
Present Value of Lease Payment	$742,098

# Present value of $1: no. of years = 4, interest = 5%

## Present value of an ordinary annuity of $1: no. of years = 4, interest = 5%

2. Calculation of present value of lease payments for lessor

Present value of periodic lease payment ($200,000 * 3.54595)	$709,190
Add: Present value of the residual value ($300,000 * 0.82270)	$246,810
Add: Present value of the excess lessee ($40,000 * 0.82770)	$32,908
Present Value of Lessor Payment	$988,908

# Present value of $1: no. of years = 4, interest = 5%

## Present value of an ordinary annuity of $1: no. of years = 4, interest = 5%

### Present value of the residual value of $1: no. of years = 4, interest = 5%

Requirement 2:- Prepare all appropriate entries for both Karrier and Allied on December 31, 2021, related to the lease.

Solution:

No	Date	General Journal	Debit ($)	Credit ($)
1.	December 31, 2021	Interest Expense ($742,098 * 5%)	$37,105
		Lease Payable	$162,895
		Cash		$200,000
2.	December 31, 2021	Amortization Expense ($742,098 / 4 )	$185,525
		Right-of-use assets		$185,525
3.	December 31, 2021	Cash	$200,000
		Lease Receivable ($200,000 - $49,445)		$150,555
		Interest Revenue ($988,908 * 5%)		$49,445

If you have any doubt, please feel free to comment me.

Thank you...