Bulls, Inc. leases a piece of equipment to Bucks Company on January 1, 2020. The contract stipulates a lease term of 5 years, with equal annual rental payments of $4,523 at the end of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $30,000, a book value of $27,000, and a useful life of 8 years. At the end of the lease term, Bulls expects the residual value of the asset to be $12,000, and this amount is guaranteed by a third party. Assuming Bulls wants to earn a 4% return on the lease and collectibility of the lease payments is probable, record its journal entry at the commencement of the lease on January 1, 2020.

Question

Bulls, Inc. leases a piece of equipment to Bucks Company on January 1, 2020. The contract stipulates a lease term of 5 years, with equal annual rental payments of $4,523 at the end of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $30,000, a book value of $27,000, and a useful life of 8 years. At the end of the lease term, Bulls expects the residual value of the asset to be $12,000, and this amount is guaranteed by a third party. Assuming Bulls wants to earn a 4% return on the lease and collectibility of the lease payments is probable, record its journal entry at the commencement of the lease on January 1, 2020.

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