Question

Concord Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Marigold Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Marigold Company has the option to purchase the equipment for $16,000 upon termination of the lease.
2.		The equipment has a cost and fair value of $157,000 to Concord Leasing Company. The useful economic life is 2 years, with a salvage value of $16,000.
3.		Marigold Company is required to pay $5,100 each year to the lessor for executory costs.
4.		Concord Leasing Company desires to earn a return of 9% on its investment.
5.		Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

(a) Prepare the journal entries on the books of Concord Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.

Date Account Titles and Explanation Debit Credit 1/1/17 Lease Receivable 157,000 Equipment 157,000 12/31/17Cash Executory Costs Payable 5100 Lease Receivable Interest Receivable 16000 12/31/18 Cash Executory Costs Payable 5100 Lease Receivable Interest Revenue

(b) Assuming that Marigold Company exercises its option to purchase the equipment on December 31, 2018, prepare the journal entry to reflect the sale on Concord’s books.

Answer 1

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Solution: Present value can be rounded per question requirement: Annuity payment: Present value of equipment 157000 Less Present value of salvage value (16000 0.84168) 13466.88 143533.1 1.75911 81594.17 Balance Annuity factor @9% for 2 Years Annuity or Rental payment As per excel formula: 81594.11 81594 ounal entries Date Account title and explaination Debit Credit 12/31/17 Cash (81594+5100) 86694 Executory costs payable Lease Receivable (81594)-(157000*996) Interest Revenue (157000*9%) To record the receipt of first installment) 5100 67464 14130 12/31/18 Cash (81594+5100) 86694 Executory costs payable Lease Receivable (81594)-(89536*996) Interest Revenue (157000-67464)*996 To record the receipt of first installment) 5100 73536 8058 Annu Interest Recovery |Lease Rec 157000 89536 16000 1 81594 1413067464 8058 73536 2 81594 Date Account title and explaination Debit Credit 12/31/18 Cash 16000 Lease Receivable 16000 To record the bargain option)