Question

The following facts pertain to a noncancelable lease agreement between Wildhorse Leasing Company and McKee Electronics, a lessee, for a computer system.

Commencement date		October 1, 2017
Lease term		6	years
Economic life of leased equipment		6	years
Fair value of asset at October 1, 2017		$354,989
Book value of asset at October 1, 2017		$280,000
Residual value at end of lease term		–0–
Lessor’s implicit rate		9	%
Lessee’s incremental borrowing rate		9	%
Annual lease payment due at the beginning of
each year, beginning with October 1, 2017		$72,600

The collectibility of the lease payments is probable by the lessor. The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.
The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a finance lease by the lessee and as a sales-type lease by the lessor.

Date		Annual Lease Payment/Receipt		Interest (9%) on Unpaid Liability/Receivable		Reduction of Lease Liability/Receivable		Balance of Lease Liability/Receivable
10/01/17								$354,989
10/01/17		$72,600				$72,600		282,389
10/01/18		72,600		$25,415		47,185		235,204
10/01/19		72,600		21,168		51,432		183,772
10/01/20		72,600		16,539		56,061		127,711
10/01/21		72,600		11,494		61,106		66,605
10/01/22		72,600		5,995		66,605		–0–
		$435,600		$80,611		$354,989

Assuming the lessor’s accounting period ends on September 30, answer the following questions with respect to this lease agreement.

(1) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2018?

(2) What items and amounts will appear on the lessor’s balance sheet at September 30, 2018?

(3) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2019?

(4) What items and amounts will appear on the lessor’s balance sheet at September 30, 2019?

Answer 1

1	Income statement of lessor Sept 30 ,2018
	jounral entries
a	Bank a/c -Dr	$ 72,600.00
	To lease rental		$ 72,600.00
	(being lease rental received)
b	Lease rental a/c -dr	$ 72,600.00
	To Finance income		$ 25,415.00
	To Lesses A/c		$ 47,185.00
	(Being lease rental apportioned)
c	Finance Income A/c- Dr	$ 25,415.00
	To P&L A/c		$ 25,415.00
	(Being income recongnised)
	Therefore , lessor's income statement will show Finance Income of $ 25415.00
2	Balance sheet of lessor sept 30 ,2018
	Finance lease a/c at $ 235,204.00 on assets side
	and current asset of $ 72,600 , in case the installment has not received from lessee
3	Income statement of lessor Sept 30 ,2019
	jounral entries
	Bank a/c -Dr	$ 72,600.00
	To lease rental		$ 72,600.00
	(being lease rental received)
	Lease rental a/c -dr	$ 72,600.00
	To Finance income		$ 21,168.00
	To Lesses A/c		$ 51,432.00
	(Being lease rental apportioned)
	Finance Income A/c- Dr	$ 21,168.00
	To P&L A/c		$ 21,168.00
	(Being income recongnised)
	Therefore , lessor's income statement will show Finance Income of $ 21,168.00
4	Balance sheet of lessor sept 30 ,2019