Question

Problem 2: Assume the same facts as for Problem 1. A. For the lessor, is the lease a finance lease or an operating lease? Explain why or why not. B. Prepare the lessor's journal entries through 12-31-Yr 1. C. What accounts and balances will be shown on the classified balance sheet and multistep income statement at 12-31-Yr2? Name of Account Balance Financial Statement Account Classification

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Answer 1

Requirement A For the Lessor, the lease is a Finance Lease. The following are the reasons- (i) Present Value of Minimum lease payments is equal to the fair value of the asset. Fair value of the asset 8000 Present value of lease rentals (+) PV of guaranteed residual value PV of Minimum Lease Payments 6684 1316 8000 (ii) The lease term covers most of the economic life of the asset Lease term Economic life Lease term coverage 3 years 5 years (3/5) = 60% (iii) The lessee has the right to exercise the option to purchase the asset at the end of the lease term.

Requirement B (in $) Credit In the Books of Lessor Journal (in $) Date Accoun Accounts Titles and Explanations Debit 12/31/Yro Lease Receivable 8,000 Sales (To record entering into finance lease agreement) | 8,000 6,000 12/31/Yro Cost of Goods sold Inventory (To record cost of goods sold) 6,000 2,338 12/31/Yro Cash Lease Receivable (To record receipt of lease rental) 2,338 2,338 12/31/Yr1 Cash Lease Receivable (8000-2338)*5% Interest income (To record receipt of lease rental) 283 2,055

Requirement C Lease Ammortization Schedule Date Annual lease receipt Interest on Receivable Reduction in Receivable Lease Receivable 12/31/Yro 12/31/Yro $ 12/31/Yr1 $ 12/31/Yr2 $ 12/31/Yr3 $ 2,338 $ 2,338 $ 2,338 $ 1,523 $ - $ 283 $ 181 $ 73 $ 2,338 $ 2,055 $ 2,157 $ 1,450 $ 8,000 5,662 3,607 1,450 Name of Account Account Classification Lease Receivable $ Financial Balance Statement 1,450 Balance Sheet Multistep Income 181 Statement Current Asset Other Non-Operating income Interest Income