Question

LESSOR ACCOUNTING – PROBLEM 2

Using the same data of the previous exercise and assuming the following information, you will

answer this exercise from the point of view of the lessor:

Collectibility of the payments is reasonably predictable, and there are no important

uncertainties surrounding the costs yet to be incurred by XYZ.

Additional information:

1. Asset’s cost $1,500,000.

2. Asset’s FMV - $2,800,000

Required:

1. Prepare journal entries for the year 2019.

LESSEE ACCOUNTING - PROBLEM 1 ABC Company (ABC), on January 1, 2019, enters into a 10-year noncancelable lease for equipment having an estimated useful life of 10 years. XYZ Corp.'s implicit interest rate is 8%. ABC uses the straight-line method to depreciate its assets. The lease contains the following provisions: 1. Rental payments of $200,000 at the beginning of each six-month period (SEMIANNUAL PAYMENTS). 2. A guarantee by ABC that XYZ Corp. (XYZ) will realize $100,000 from selling the asset (RESIDUAL VALUE) at the expiration of the lease. ABC believes that it is probable that the expected residual value will be greater than the guaranteed residual value. 3. The lease contains no renewal options. The equipment reverts to lessor at the termination of the lease. Required: a. Compute the present value test. b. Compute the present value of the lease payments to be recorded as a liability. c. Prepare an amortization schedule table for the liability through the year 2021. d. Prepare journal entries for the year 2019.

Answer 1

Calculation of present value: The formula to calculate the present value is given below the calculation

As the first installment will be made at the beginning it will not be discounted to present value.

n	installment	half year rate	Present value
0	200000	4%	200000
1	200000	4%	192307.6923
2	200000	4%	184911.2426
3	200000	4%	177799.2717
4	200000	4%	170960.8382
5	200000	4%	164385.4214
6	200000	4%	158062.9051
7	200000	4%	151983.5626
8	200000	4%	146138.041
9	200000	4%	140517.3471
10	200000	4%	135112.8338
11	200000	4%	129916.1863
12	200000	4%	124919.4099
13	200000	4%	120114.8172
14	200000	4%	115495.0166
15	200000	4%	111052.9005
16	200000	4%	106781.6351
17	200000	4%	102674.6492
18	200000	4%	98725.6242
19	200000	4%	94928.48481
			2826787.88
Present value = installment / (1+.04) raise to the power "n"
n is the number of installment

Total present value here will be $2,826,788.00

Journal Entries in the books of lessor are as follows

Date	Particulars	Amount Dr.	Amount Cr
Jan.1, 2019	Lease receivable A/c Dr. To Equipment A/c (Lease recorded at present value)	$2,826,788	$2,826,788
Jan.1, 2019	Cash A/c Dr. To Lease receivable A/c (Amount of lease received recorded)	$200,000	$200,000
July 1, 2019	Cash A/c Dr. To Lease receivable A/c To Interest or Finance Income A/c (the whole amount of lease is received i.e. $200,000 of which $7,692 is finance income which arrives after deducting present value from the lease amount.)	$200,000	$192,308 $7,692

Journal entries in the following year will be made in the similar way as the entry made on July 1, 2019.