Question

Terms of a lease agreement and related facts were: a. Incremental costs of commissions for brokering the lease and consummating the completed lease transaction incurred by the lessor were $4,332 b. The retail cash selling price of the leased asset was $525,000. Its useful life was three years with no residual value The lease term is three years and the lessor paid $525,000 to acquire the asset. d. Annual lease payments at the beginning of each year were $195.000 e Lessor's implicit rate when calculating annual rental payments was 15% (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 2018 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, 2018, the 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, 2018. (Round you 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 View journal entry worksheet Credit Debit 525,000 525,000 Record the lease. Record the payment of initial direct costs. 3 Record the cash received.

Answer 1

Solution to point 1

Journal entry

The entry is to record the equipment lease.

Date	Particular	Debit $	Credit $
jan 1, 2018	Lease receivable........................dr.	525000
	To Equipment A/c		525000
	(being equipment lease recorded)

The entry is to record the lease payment

Date	Particular	Debit	Credit
Jan 1, 2018	Lease receivable........................dr.	4332
	To cash		4332
	(being Lease Payment Recorded)

A solution to Point 2

The effective rate of interest revenue:

The initial direct costs increase the net investment (lease receivable): $525000 + $ 4332= $529332 The new effective rate is the discount rate that equates
the net investment and future lease payments:

$529332 /$195000 = 2.7145230

present value table for an annuity due, we have search row 3 (n=3)
for this value and find it in the 11% column. So the new effective interest rate is 1110%. The net investment is amortized at the new rate.

Solution to point 3.

The entry is to record the interest revenue

Date	Particular	Debit $	Credit $
Dec1, 2018	Interest Receivable A/c dr.	36776.52
	To Interest Revenue A/c 11% ($525000 + $4332- $ 195000)		36776.52