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 $971,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2024, will be $315,000. Negotiations led to the lessee guaranteeing a $370,000 residual value.

Equal payments under the finance/sales-type lease are $215,000 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 5% 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

1. In the books of K (Lessee):

Date	Particulars	Debit ($)	Credit ($)
	Right – to -use equipment	807,629
	Lease liability		807,629
	(to record the lease asset and lease liability)

In the books of A (Lessor):

Date	Particulars	Debit ($)	Credit ($)
	Lease receivable	807,629
	Residual asset($971,000 – ($807,629/$971,000*$971,000)	163,371
	Asset for lease		971,000
	(to record the lease receivable and residual asset)

Working notes:

Present value of lease payment:

Particulars	Amount ($)
Present value of periodic lease payments ($215,000*3.54595(PVAIF(5%,4))	762,380
Add: Present value of excess lessee- guarantee residual value ($55,000*0.82270 (PVIF(7%,4))	45,249
Present value of lease payments	807,629

2) In the books of K(Lessee):

Date	Particulars	Debit ($)	Credit ($)
	Interest expense ($807,629 *5%)	40,381
	Lease liability (Difference)	174,619
	Cash (Lease payment)		215,000
	(to record the lease payment)

Date	Particulars	Debit ($)	Credit ($)
	Amortization expense ($807,629/4yrs)	201,907
	Right of use asset		201,907
	(to record the amortization expense )

In the books of A (Lessor):

Date	Particulars	Debit ($)	Credit ($)
	Cash (Lease payment )	215,000
	Lease receivable (Difference)		174,619
	Interest revenue		40,381
	(to record the lease receivable)

Date	Particulars	Debit ($)	Credit ($)
	Residual asset ($163,371*5%)	8,169
	Accretion revenue		8,169
	(to record the accretion revenue

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