Question

Fox Financing, Inc. leased a drilling machine to lease to Guy Company. The noncancelable lease requires lease payments of $5,000 per year, payable in advance, over a four-year period. There is a bargain purchase option of $10,000 for Guy. Fox's implicit interest rate (known to Guy) is 10 percent. The lease term begins on January 1,2019. The machine's economic life is 10 years. The machine's book value is $22,000 and fair value $25,000. The collectability of the lease payments is probable for the lessor. (Present value of an ordinary annuity of 1 for 4 periods at 10% is 3.16986, of an annuity due of 1 for 4 periods at 10% is 3.48685. Present value of 1 for 4 periods at 10% is 0.68301). Notes: Read carefully and follow strictly so that Bb can grade you correctly! 1. Use comma in numbers, one thousand is 1,000, not 1000. No $ sign. No positive or negative sign. 2. If no entry is required, write N/A. 3. Only use the following accounts: Cash, CGS, Lease receivable, Inventory, Sales revenue, Interest revenue, ROU asset, Lease liability, Depreciation expense, Interest expense. 4. Copy account names accurately to receive credits, names are not case sensitive

Answer 1

Assuming Guy will not excercise its purchase option.

Journal Entries

Date	Journal Entries		Dr.	Cr.
1/1/2019	Lease Receivable Account	Dr.	17,434
	To Sales Revenue Account (Deferred Lease revenue)			17,434
1/1/2019	Cash Account	Dr.	5,000
	To Lease Receivable Account			5,000
12/31/2019	Lease Receivable Account	Dr.	1,243
	To Interest Income			1,243
12/31/2019	Cash Account	Dr.	5,000
	To Lease Receivable Account			5,000
12/31/2019	Depreciation Expenses Account	Dr.	2,200
	To ROU Asset Account			2,200
12/31/2019	Sales Revenue Account (Deferred Lease revenue)	Dr.	3,757
	To Sales Revenue Account (Lease revenue)			3,757
12/31/2019	Sales Revenue Account (Lease revenue)	Dr.	3,757
	Interest Income Account	Dr.	1,243
	To Depreciation Expenses Account			2,200
	To Statement of Profit & Loss Account (Balancing Figure)			2,800
12/31/2020	Lease Receivable Account	Dr.	868
	To Interest Income			868
12/31/2020	Cash Account	Dr.	5,000
	To Lease Receivable Account			5,000
12/31/2020	Depreciation Expenses Account	Dr.	2,200
	To ROU Asset Account			2,200
12/31/2020	Sales Revenue Account (Deferred Lease revenue)	Dr.	4,132
	To Sales Revenue Account (Lease revenue)			4,132
12/31/2020	Sales Revenue Account (Lease revenue)	Dr.	4,132
	Interest Income Account	Dr.	868
	To Depreciation Expenses Account			2,200
	To Statement of Profit & Loss Account (Balancing Figure)			2,800
12/31/2021	Lease Receivable Account	Dr.	455
	To Interest Income			455
12/31/2021	Cash Account	Dr.	5,000
	To Lease Receivable Account			5,000
12/31/2021	Depreciation Expenses Account	Dr.	2,200
	To ROU Asset Account			2,200
12/31/2021	Sales Revenue Account (Deferred Lease revenue)	Dr.	4,545
	To Sales Revenue Account (Lease revenue)			4,545
12/31/2021	Sales Revenue Account (Lease revenue)	Dr.	4,545
	Interest Income Account	Dr.	455
	To Depreciation Expenses Account			2,200
	To Statement of Profit & Loss Account (Balancing Figure)			2,800
12/31/2022	Sales Revenue Account (Deferred Lease revenue)	Dr.	5,000
	To Sales Revenue Account (Lease revenue)			5,000
12/31/2022	Sales Revenue Account (Lease revenue)	Dr.	5,000
	Interest Income Account	Dr.	-
	To Depreciation Expenses Account			2,200
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