Question

Exercise 21A-6 a-b (Part Level Submission) Shamrock Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Pharoah Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. 2. 3. 4. Pharoah has the option to purchase the equipment for $23,000 upon termination of the lease. It is not reasonably certain that Pharoah will exercise this option. The equipment has a cost of $260,000 and fair value of $290,000 to Shamrock Leasing. The useful economic life is 2 years, with an unguaranteed residual value of $23,000. Shamrock Leasing desires to earn a return of 5% on its investment. Collectibility of the payments by Shamrock Leasing is probable. Click here to view the factor table.

Answer 1

Answer:

Fair value = 290000
Less: Present value of residual value (23000*0.90703) = 20862
Present value of lease payments = 269138
Annual lease payment (269138/1.85941) = 144744

a)

Date	Account title and explanation	Debit ($)	Credit ($)
1/1/17	Lease receivable	$290000
	Cost of goods sold (260000-20862)	$239138
	Sales (PV of lease pmt,refer above)		$269138
	Equipment		$260000
	(To record the lease )
12/31/17	Cash	$144744
	Lease Receivable		$130244
	Interest Revenue (290000*5%)		$14500
	(To record the receipt of lease installment)
12/31/18	Cash	$144744
	Lease Receivable		$136756
	Interest Receivable (290000-130244)*5%		$7988
	(To record the receipt of lease installment)