Question

Exercise 21-4 Pronghorn Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Stellar 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. Stellar Company has the option to purchase the equipment for $16,100 upon termination of the lease. 2. The equipment has a cost and fair value of $164,000 to Pronghorn Leasing Company. The useful economic life is 2 years, with a salvage value of $16,100. 3. Stellar Company is required to pay $4,900 each year to the lessor for executory costs 4, Pronghorn Leasing Company desires to earn a return of 10% 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 Pronghorn Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Round present value factor calculations to 5 decimal places, e.g. 0.527552 and the final answers to O decimal places e.g. 5,275.) Date Account Titles and Explanation Debit Credit (b) Assuming that Stellar Company exercises its option to purchase the equipment on December 31, 2018, prepare the journal entry to reflect the sale on Pronghorn's books. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts. Round present value factor calculations to 5 decimal places, e.g. 0.527552 and the final answers to 0 decimal places e.g. 5,275.) Date Account Titles and Explanatiorn Debit Credit 12/31/18

Answer 1

Present value of equipment = $164,000

Less: Present value of salvage value = $13,305.85 ($16,100*0.82645)

Balance = $150,694.15

Annuity or Rental payment = $150,694.15 * Annuity factor at 10% for 2 years

= $150,694.15 / 1.73554

= $86,828

Journal Entries:

a)

Date Accounts Titles and Explanations Debit (S) Credit (S) 1/1/2017 Lease Receivable 164,000 164,000 (To record the lease 91,728 12/31/2017 Cash (S86,828 + S4,900) Executory costs payable 4,900 Lease receivable ($86,828 [S164.000*10/100 70,428 Interest Revenue (S164,000*10/100) 16,400 (To record the receipt of first installment 91,728 12/31/2018 Cash (S86,828 + S4,900) Executory costs payable 4,900 Lease receivable [$86.8281 - (S164,000 $70.428S93.572 10/100 77,471 Interest Receivable (S164,000 - S70,428- S93,572*10/100) (To record the receipt of second installment) 9,357

b)

Debit (S) Credit (S) 16,101 Accounts Titles and Explanations Date 12/31/2018 Cash 16,101 Lease Receivable (S164,000 - S70,428 - S77,471) (To record the option to purchase the equipment on bargain option)