Question

On January 1, 2021, Company A leased equipment from Company B. The lease agreement specifies seven annual payments of $50,000 beginning January 1, 2021, the beginning of the lease, and at each December 31, thereafter. At the end of the seven-year lease term the equipment will be returned to the lessor and is expected to have a residual value of $24,000. The estimated useful life of the equipment is eight years. The interest rate in these financing arrangements is 10%. Company B manufactured the equipment at a cost of $200,000. Which of the following is true regarding the entries made on January 1, 2021?

Group of answer choices

Company B will debit equipment for $200,000.

Company B will credit sales revenue for $267,763.

Company B will credit sales revenue for $280,079.

Company B will debit lease receivable for $267,763.

Answer 1

Answer: Company B will credit sales revenue for $267,763.

Calculation

Year	PV factor @ 8%	Remarks
0	1.00000
1	0.90909	= 1 / 1.10
2	0.82645	= 0.90909 / 1.10
3	0.75131	= 0.82645 / 1.10
4	0.68301	= 0.75131 / 1.10
5	0.62092	= 0.68301 / 1.10
6	0.56447	= 0.62092 / 1.10
7	0.51316	= 0.56447 / 1.10
Total (0 to 6)	5.35526

For Lessor (Company B)
Present value of lease payments (50000*5.35526)	$        267,763
Present value of residual value (24000*0.51316)	$          12,316
Lease receivable	$        280,079

Present value of unguaranteed residual value ($12,316) is deducted from cost of goods sold and sales revenue.
Date	Accounts titles and explanation		Debit	Credit
January 1, 2021	Lease receivable		280,079
	Cost of goods sold (200000-12316)		187,684
	Sales revenue (280079-12316)			267,763
	Equipment			200,000
	(To record lease agreement for sales type lease.)