Question

Kingbird Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Blossom Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Blossom has the option to purchase the equipment for $26,000 upon termination of the lease. It is not reasonably certain that Blossom will exercise this option.
2.		The equipment has a cost of $320,000 and fair value of $376,000 to Kingbird Leasing. The useful economic life is 2 years, with a residual value of $26,000.
3.		Kingbird Leasing desires to earn a return of 5% on its investment.
4..		Collectibility of the payments by Kingbird Leasing is probable. Prepare the journal entries on the books of Kingbird Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)

Answer 1

ANSWER

Prepare journal entries: Credit Date Account Titles and Explanation 1/1/20 Lease receivable Cost of goods sold (320000-23583) Inventory Sales revenue (PV of lease amt) S $ Debit 376,000 296,417 $ 320,000 $352,417 12/31/20 S 189,532 Cash {[376,000-(26000/1.05*1.05)]1.85941} Interest revenue (376.000*0.05) Lease receivable (Bal.fig) S 18.800 $ 170.732 12/31/21 S 189,532 Cash Interest revenue (376,000-170732)*0.05 Lease receivable (Bal fig) S 10,263 $ 179,269 3760001 Fair value Less: Present value of salvage value (26000*0.90703) Present value of lease payments Annual lease payment (352417/1.85941) 23583 352417 189532 Workings: 1/1.05 1/1.0542 Total 0.952380952) 0.907029478 1.859410431

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