Question

On January 1, 2021, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $965,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2024, will be $309,000. Negotiations led to the lessee guaranteeing a $358,000 residual value.

Equal payments under the finance/sales-type lease are $209,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Karrier is aware that Allied used a 8% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2021, to record the lease.
2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2021, related to the lease.

Answer 1

	Date	Lease Payment	PV Factor @8%	Present Value
		& GRV
	Dec.31,2021	209,000	0.92593	193,519
	Dec.31,2022	209,000	0.85734	179,184
	Dec.31,2023	209,000	0.79383	165,911
	Dec.31,2024	209,000	0.73503	153,621
	Dec.31,2024	358,000	0.73503	263,141
	Total	1,194,000		955,376
1.)	Date	Account Titles	Debit $	Credit $
	Karrier
	Jan.01,2021	Right of use assets	955,376
		Lease liability		955,376
	Allied
	Jan.01,2021	Lease Receivable	955,376
		Cost of goods sold	965,000
		Sales Revenue		955,376
		Equipment		965,000
2.)	Date	Account Titles	Debit $	Credit $
	Karrier
	Dec.31,2021	Amortization Expense	238,844
		Right of use assets		238,844
		(955,376 / 4 )
	Dec.31,2021	Interest Expense ( 955,376 x 8% )	76,430
		Lease liability	132,570
		Cash		209,000
	Allied
	Dec.31,2021	Cash	209,000
		Interest Revenue		76,430
		Lease Receivable		132,570