Question

Metlock Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $240,000. The fair value of the asset at January 1, 2020, is $240,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $24,323, none of which is guaranteed. 4. The agreement requires equal annual rental payments, beginning on January 1, 2020. 5. Collectibility of the lease payments by Metlock is probable. Click here to view factor tables.

Assuming the lessor desires a 7% rate of return on its investment, calculate the amount of the annual rental payment required.

Prepare an amortization schedule that is suitable for the lessor for the lease term.

Prepare all of the journal entries for the lessor for 2020 and 2021 to record the lease agreement, the receipt of lease payments, and the recognition of revenue. Assume the lessor’s annual accounting period ends on December 31, and it does not use reversing entries.

Answer 1

a) $240,000 $16,207 Fair value of leased asset to lessor Less: Present value of residual value (S24,323 * 0.66634) Amount to be recovered $223,793 $43,879 Amount of the annual rental payment (S223,793 / 5.10020) b) Date 1/1/20 1/1/20 1/1/21 1/1/22 1/1/23 1/1/24 1/1/25 12/31/25 Metlock Leasing Company (Lessor) Lease Amortization Schedule Annual Interest on Recovery Lease lease Lease of lease Payment receivable receivable receivable Plus URV (7%) $240.000 $43,879 SO $43,879 $196,121 $43,879 $13,728 $30,151 $165.970 $43.879 $11,618 $32.261 $133,709 $43,879 $9,360 $34,519 $99.190 $43,879 $6,943 $36,936 $62,254 $43,879 $4,358 $39,521 $22.733 $24,323 $1,590 $22,733 SO $287,597 $47,597 $240,000 c) Date 1/1/20 Account Titles and Explanation Lease Receivable Cost of Goods Sold Sales Revenue Equipment (To record the lease) Debit Credit $240.000 $223,793 $223,793 $240,000 1/1/20 $43.879 Cash Lease receivable (To record the receipt of lease payment) $43,879 $13,728 12/31/20 Lease Receivable Interest Revenue $13,728 1/1/21 $43.879 Cash Lease receivable (To record the receipt of lease payment) $43,879 $11.618 12/31/21 Lease Receivable Interest Revenue $11,618