Question

1. (LESSOR ENTRIES FOR FINANCING LEASE WITH A GUARANTEED RESIDUAL) The following facts pertain to a non-cancelable lease agreement between Ace Leasing Company and King Company, a lessee. January 1, 2020 $137,171 $54,000 $500,000 Commencement of Lease Date Annual lease payment due at the beginning of the year beginning with January 1, 2020 Residual value of equipment at end of lease term, guaranteed by lessee Book Value of Lease Equipment on LESSOR books Lease term Economic life of leased equipment Fair Value of asset at January 1, 2020 Lessor's Implicit Rate Lessee's incremental borrowing rate The asset will revert to the lessor at the end of the lease term. 6 years 7 years $659,000 12% 12% this lease from the Lessee prospective in the Lessee for this chapter. Based on what you found it was a financing lease. In this problem you will complete the LESSOR entries. You do not need to redo it it is still a financing lease with a guaranteed residual. A. Prepare the entry on the Lessor's book to record this Lease on 1/1/2020. You will need to compute the Lease Receivable debit, the CGS debit, the Equipment credit and the Sale Revenue credit to complete the entry. B. Complete the entry to receive the first rental payment on 1/1/2020. C. Prepare the interest revenue amortization schedule for the first two years and prepare the interest revenue entry for 12/31/2020.

Answer 1

a and b	Journal Entries
	Date	Particulars	Debit	Credit
	Jan1,2020	Lease Receivables	$    659,000
		Cost of goods sold	$    500,000
		Equipment		$    500,000
		Sales revene		$    659,000
		(To record lease agreement )
	Jan1,2020	Cash	$    137,171
		Lease Receivables		$    137,171
		(To record first laese payment received)
	Dec 31,2020	Interest Receivable	$      62,619
		Interest Revenue		$      62,619
		(To record accured interest on lease receipt )
c	Interst Revenue Amortization Schedule
	Date	Beginning balance of lease receivable	Lease Receipt	Interest Revenue	Reduction in interest receivable	Closing balance of lease receivable
	01-Jan-20	659000	$    137,171		$    137,171	$    521,829
	01-Jan-21	521829	$    137,171	$      62,619	$      74,552	$    447,277
	01-Jan-22	447277	$    137,171	$      53,673	$      83,498	$    363,779
	01-Jan-23	363780	$    137,171	$      43,654	$      93,517	$    270,263
	01-Jan-24	270262	$    137,171	$      32,431	$    104,740	$    165,522
	01-Jan-25	165523	$    137,171	$      19,863	$    117,308	$      48,215
	01-Dec-25	48215	$      54,000	$         5,786	$      48,214	$                -
	Closing balance of lease receivable at the end of lease term must be zero.
	The interest of 62619 is recorded as interest receivable on December 31,2020