Question

Coronado Corporation enters into a 7-year lease of equipment on December 31, 2016, which requires 7 annual payments of $37,300 each, beginning December 31, 2016. In addition, Coronado guarantees the lessor a residual value of $19,400 at the end of the lease. However, Coronado believes it is probable that the expected residual value at the end of the lease term will be $9,400. The equipment has a useful life of 7 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $170,000. Prepare Lost Ark’s 2016 and 2017 journal entries, assuming the implicit rate of the lease is 9% and this is known to Coronado.

Answer 1

a	Annual Lease payment	37300
b	Guaranteed residual value	19400
c	Implicit rate (r)	9%
d	Present value annuity factor for seven years (1/(1+r)^1 + 1/(1+r)^2+…....1/(1+r)^7, r=expected rate of return	5.03295284
e	Present value factor for seventh year	0.54703424
g	Present value of yearly lease payment (d*b)	187729.141
i	Present value of amount received on at the end of lease term (guaranteed residual value) (1/1+r)^7 *(e*b)	10612.4643
j	Net present value (i+g)	198,341.61
k	Asset book value	170000
l	Profit on lease	28,341.61
1	Coronado Corporation A/c	Debit	198,341.61
	To Equipment A/c	Credit	170000
	TO Profit on lease of equipment	Credit	28,341.61
Narration	Being lease agreement entered
	Note: It is a descretion to choose to recognize the profit on lease immidiately or over the lease term
		Debit	Credit
2	Cash A/c	37300
	To Coronado Corporation		19,449.26
	To Finance charge (198341*9%)		17,850.74
Narration	Being finance charge recognized
Second year
3	Cash A/c	37300
	To Coronado Corporation		21,199.69
	To Finance charge (198341-19449)*9%		16,100.31
	Being second year finance charge received
Alternative two	If the profit on lease is apportioned over the lease term the below entry will be in addition to above entry every year
1	Profit on lease of equipment (28,341/7)	4048.71429
	To Profit and loss accoount		4048.71429
	Being profit on lease apportioned
If not complete profit is taken to profit and loss in the first year itself