Question

On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

•	The lease is noncancelable and has a term of 8 years.
•	The annual rentals are $30,400, payable at the beginning of each year.
•	The interest rate implicit in the lease is 12%.
•	Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2026.
•	The cost of the equipment to the lessor is $145,500, and the fair value is approximately $169,100.
•	Ballieu incurs no material initial direct costs.
•	It is probable that Ballieu will collect the lease payments.
•	Ballieu estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of $30,400 discounted at 12% is $169,138.21 (the $1 purchase option is ignored as immaterial).

Required:

1.	Next Level Identify the classification of the lease transaction from Ballieu’s point of view.
2.	Prepare all the journal entries for Ballieu for the years 2019 and 2020.

Answer 1

1. In this case I see the risk and all other thing is transfered to the other person and Financial lease where the leasor transfer substaintially all the risk and reward related of the asset to the lessee, generally the ownership is transfered to the leasser at the end of the econimic life of asset.

2. Journal entries

Date	Perticulars	Debit	Credit
1, Jan 2019	Lease recivable A/c Dr To Asset A/c	1,69,138.21	1,69,138.21
1, Jan 2019	Cash A/c Dr. To Lease recivable A/c To Financial income A/c	30,400	26,176 3648
1, Jan 2020	Lease recivable A/c Dr To Asset A/c	142,386.21	142,386.21
1, Jan 2020	Cash A/c Dr. To Lease recivable A/c To Financial income A/c	30,400	26,176 3648
1, Jan 2021	Lease recivable A/c Dr To Asset A/c	115,634.21	115,634.21
1, Jan ​​​​​​​2021	Cash A/c Dr. To Lease recivable A/c To Financial income A/c	30,400	26,176 3648
1, Jan ​​​​​​​2022	Lease recivable A/c Dr To Asset A/c	88,882.21	88,882.21
1, Jan ​​​​​​​2022	Cash A/c Dr. To Lease recivable A/c To Financial income A/c	30,400	26,176 3648
1, Jan ​​​​​​​2023	Lease recivable A/c Dr To Asset A/c	62,130.21	62,130.21
1, Jan ​​​​​​​2023	Cash A/c Dr. To Lease recivable A/c To Financial income A/c	30,400	26,176 3648
1, Jan ​​​​​​​2024	Lease recivable A/c Dr To Asset A/c	35,378.21	35,378.21
1, Jan ​​​​​​​2024	Cash A/c Dr. To Lease recivable A/c To Financial income A/c	30,400	26,176 3648
1, Jan ​​​​​​​2025	Lease recivable A/c Dr To Asset A/c	8626.21	8626.21
1, Jan ​​​​​​​2025	Cash A/c Dr. To Lease recivable A/c To Financial income A/c	30,400	​​​​​​​26,176 3648
1, Jan ​​​​​​​2026	Lease recivable A/c Dr To Asset A/c	1	1