Question

view Poll CIES Current Attempt in Progress port Skysong, Inc. leases a piece of equipment to Bucks Company on January 1, 2017. The contract stipulates a lease term of 5 years, with equal annual rental payments of $4,704 at the end of each year. Ownership does not transfer at the end of the lease term. there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $31,052, a book value of $26,052 and a useful life of 8 years. At the end of the lease term, Skysong expects the residual value of the asset to be $12,300, and this amount is guaranteed by a third party. Assuming Skysong wants to earn a 4% return on the lease and collectibility of the lease payments is probable, record its journal entry at the commencement of the lease on January 1, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places, e.g. 5,275.) Click here to view the factor table. Debit Credit Account Titles and Explanation

Answer 1

For a lessor, residual value guaranteed by 3rd party considered for calculating minimum lease payments.

Calculation of Present vaue of Minumum lease payments
Period	Particulars	Payments	PV factor $ 4%	PV of Minmum lease payments
1	Lease installment	$          4,704	0.96154	$               4,523
2	Lease installment	$          4,704	0.92456	$               4,349
3	Lease installment	$          4,704	0.889	$               4,182
4	Lease installment	$          4,704	0.85481	$               4,021
5	Lease installment	$          4,704	0.82193	$               3,866
5	Guranteed residual value by 3rd party	$        12,300	0.82193	$            10,111
	Total PV of MLP			$            31,052

Since the present value of minimum payments equal to the fair value of the asset, it is a finance lease.

January 01,2017	Lease receivable	$        31,052
	Asset		$        26,052
	Unearned lease finance income		$          5,000
	(To record lease at the commencement of lease)