On January 1, 2017, Sunland Company leased equipment to Flynn
Corporation. The following information pertains to this
lease:
1. | The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $5,000. | |
2. | Equal rental payments are due on January 1 of each year, beginning in 2017. | |
3. | The fair value of the equipment on January 1, 2017, is $140,000, and its cost is $110,000. | |
4. | The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. | |
5. | Sunland set the annual rental to ensure a 5% rate of return. Flynn’s incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown. | |
6. | Collectibility of lease payments by the lessor is probable. |
Both the lessor and the lessee’s accounting periods end on December
31.
Computation of annual rental payment (by the lesssor):
Fair value of leased asset | $140,000 | |
Less: Present value of bargain-purchase option ($2,000 × 0.74622*) | $1,492 | |
PV of lease payments | $138,508 | |
Six annual lease payments: $138,508 ÷ 5.32948** | $25,989 |
*Present value of $1 at 5% for 6 periods.
**Present value of an annuity due at 5% for 6 periods.
Prepare all the necessary journal entries for Sunland for 2017.
(Credit account titles are automatically indented when
the amount is entered. Do not indent manually. Round answers to 0
decimal places, e.g. 5,275.)
Date |
Account Titles and Explanation |
Debit |
Credit |
1/1/17 |
|||
(To record the lease) |
|||
(To record lease payment) |
|||
12/31/17 |
|||
Date | Account titles and explanation | Debit | Credit | |||||
1/1/2017 | Lease receivable | 140000 | ||||||
Cost of goods sold | 110000 | |||||||
Sales revenue | 140000 | |||||||
Equipment | 110000 | |||||||
(Lease recorded) | ||||||||
Cash | 25989 | |||||||
Lease receivable | 25989 | |||||||
(Lease payment received) | ||||||||
12/31/2017 | Interest receivable | (140000-25989)*5% | 5701 | |||||
Interest revenue | 5701 | |||||||
(Interest on lease due) | ||||||||
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