Question

Franklin Co. leased its manufactured equipment to Parker Inc. for a 4-year term. Franklin Co. reported a book value of $65,000 for the equipment in its inventory account. The lease commenced on January 1, 2020, with the first annual payment of $20,000 due immediately. The equipment has a useful life of 4 years, an estimated fair value of $72,486, and no residual or salvage value. The implicit rate of the lease is 7% and collectability of the lease payments from Parker is probable. Which of the following is true regarding Franklin's journal entries at the commencement of the sales-type lease? The lease payable is equal to $68,880 and Cost of Goods Sold of A. 65,000 The Sales Revenue on Franklin's books is equal to $72,486 and B. Cost of Goods Sold of $65,000 The Gross Profit resulting from the initial entries is $7,400 and lease payable of 72,486 The lease receivable is equal to $65,000 and Sales Revenue of D. $72,486

Answer 1

				Amount $
	Year	Lease Payment	PV Factor @7%	Present Value
	1	20,000	1	20,000
	2	20,000	0.93458	18,692
	3	20,000	0.87344	17,469
	4	20,000	0.81630	16,326
	Total			72,486
		Account Titles	Debit $	Credit $
		Lease receivable	72,486
		Cost of Goods sold	65,000
		Sales revenue		72,486
		Equipment		65,000

Correct answer is option B ( Sales Revenue on Franklin book of $ 72,486 & Cost of goods sold of $ 65,000 ).