Question

Question 12

The following facts pertain to a non-cancelable lease agreement between Shamrock Leasing Company and Pharoah Company, a lessee.

Commencement date		May 1, 2020
Annual lease payment due at the beginning of
each year, beginning with May 1, 2020		$17,865.02
Bargain purchase option price at end of lease term		$7,000
Lease term		5	years
Economic life of leased equipment		10	years
Lessor’s cost		$65,000
Fair value of asset at May 1, 2020		$85,000
Lessor’s implicit rate		6	%
Lessee’s incremental borrowing rate		6	%

The collectibility of the lease payments by Shamrock is probable.

1. Compute the amount of the lease receivable at commencement of the lease. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answer to 2 decimal places, e.g. 5,275.15.)

2. Suppose the collectibility of the lease payments was not probable for Shamrock. Prepare all necessary journal entries for the company in 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.15.)

Answer 1

Date	Annual Lease	Interest (6%) on Unpaid	Reduction of Lease	Balance of Lease
	Payment/Receipt	Liability/Receivable	Liability/Receivable	Liability/Receivable
01-May-20				85,000
01-May-20	17,865.02			67134.98
01-May-21	17,865.02	4,028	13,836.92	53298.05
01-May-22	17,865.02	3,197.88	14,667.13	38,630.91
01-May-23	17,865.02	2,317.85	15.547.16	23,083.74
01-May-24	17,865.02	1,385.02	16,479.99	6,603.74
31-05-2024	7000	396.22	6,603.7	0
	96,325.1	11,324.97	67,137.9

Journal Entry
Date	Accoutn Tittle	Debit	Credit
01-05-2020	sales	85,000.00
	Cost of Goods Sold	65,000.00
	Lease Receivable		85,000.00
	Inventory		65,000.00
	To Recor dthe Lease
01-05-2020	Cash	17,865.02
	Lease Receivable		17,865.02
	To Record Lease Payment
31-05-2020	Interest Receivable	2685
	Interest Revenue		2,685
	(4028.09/12*8)
01-05-2021	cash	17865.02
	Interest Receivable		2,685.44
	Interest Revenue (4028/12*4)		1342.66
	Lease Receivable		13,836.92
31-05-2021	Interest Receivable	2,131.92
	Interest Revenue		2,131.92
	(3197.88/12*8)