Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year. 2. The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom. 3. Davis agrees to pay all executory costs directly to a third party. 4. The interest rate implicit in the lease is 14%. 5. The initial direct costs are insignificant and assumed to be zero. 6. It is probable that Edom will collect the lease payments. Required: 1 Prepare a table summarizing the lease receipts and interest income earned by Edom. 2. Prepare a table showing the accretion of the unguaranteed residual asset. 3. Prepare journal entries for Edom, the lessor, for the years 2019 and 2020. Edom Company General Ledger ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 123 Equipment Leased to Others 124 Unguaranteed Residual Asset 141 Inventory 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 231 Salaries Payable 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 433 Interest Income EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 559 Miscellaneous Expenses 910 Income Tax Expense Edom Company Summary of Lease Payments Received and Interest Income Earned 1 Date Annual Lease Payments Received Interest Income at 14% on Lease Receivable Lease Receivable 2 January 1, 2019 3 January 1, 2019 4 December 31, 2019 5 January 1, 2020 6 December 31, 2020 7 January 1, 2021 8 December 31, 2021 9 January 1, 2022 10 December 31, 2022 11 January 1, 2023 3. Prepare a table showing the accretion of the unguaranteed residual asset. Additional Instructions Edom Company Accretion Schedule for Unguaranteed Residual Asset 1 Date Accretion/Interest Income Unguaranteed Residual Asset Balance 2 January 1, 2019 3 December 31, 2019 4 December 31, 2020 5 December 31, 2021 6 December 31, 2022 7 December 31, 2023 General Journal 4a. Prepare journal entries for Edom, the lessor, for the year 2019. General Journal Instructions PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 4b. Prepare journal entries for Edom, the lessor, for the year 2020. PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6

Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year. 2. The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom. 3. Davis agrees to pay all executory costs directly to a third party. 4. The interest rate implicit in the lease is 14%. 5. The initial direct costs are insignificant and assumed to be zero. 6. It is probable that Edom will collect the lease payments. Required: 1 Prepare a table summarizing the lease receipts and interest income earned by Edom. 2. Prepare a table showing the accretion of the unguaranteed residual asset. 3. Prepare journal entries for Edom, the lessor, for the years 2019 and 2020. Edom Company General Ledger ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 123 Equipment Leased to Others 124 Unguaranteed Residual Asset 141 Inventory 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 231 Salaries Payable 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 433 Interest Income EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 559 Miscellaneous Expenses 910 Income Tax Expense Edom Company Summary of Lease Payments Received and Interest Income Earned 1 Date Annual Lease Payments Received Interest Income at 14% on Lease Receivable Lease Receivable 2 January 1, 2019 3 January 1, 2019 4 December 31, 2019 5 January 1, 2020 6 December 31, 2020 7 January 1, 2021 8 December 31, 2021 9 January 1, 2022 10 December 31, 2022 11 January 1, 2023 3. Prepare a table showing the accretion of the unguaranteed residual asset. Additional Instructions Edom Company Accretion Schedule for Unguaranteed Residual Asset 1 Date Accretion/Interest Income Unguaranteed Residual Asset Balance 2 January 1, 2019 3 December 31, 2019 4 December 31, 2020 5 December 31, 2021 6 December 31, 2022 7 December 31, 2023 General Journal 4a. Prepare journal entries for Edom, the lessor, for the year 2019. General Journal Instructions PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 4b. Prepare journal entries for Edom, the lessor, for the year 2020. PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 2E: Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement...

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Question

Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

1.	The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year.
2.	The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom.
3.	Davis agrees to pay all executory costs directly to a third party.
4.	The interest rate implicit in the lease is 14%.
5.	The initial direct costs are insignificant and assumed to be zero.
6.	It is probable that Edom will collect the lease payments.

Required:


1	Prepare a table summarizing the lease receipts and interest income earned by Edom.
2.	Prepare a table showing the accretion of the unguaranteed residual asset.
3.	Prepare journal entries for Edom, the lessor, for the years 2019 and 2020.

Edom Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
122	Lease Receivable
123	Equipment Leased to Others
124	Unguaranteed Residual Asset
141	Inventory
152	Prepaid Insurance

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

REVENUE
411	Sales Revenue
433	Interest Income

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Edom Company

Summary of Lease Payments Received and Interest Income Earned

1	Date	Annual Lease Payments Received	Interest Income at 14% on Lease Receivable	Lease Receivable
2	January 1, 2019
3	January 1, 2019
4	December 31, 2019
5	January 1, 2020
6	December 31, 2020
7	January 1, 2021
8	December 31, 2021
9	January 1, 2022
10	December 31, 2022
11	January 1, 2023

3. Prepare a table showing the accretion of the unguaranteed residual asset.

Additional Instructions

Edom Company

Accretion Schedule for Unguaranteed Residual Asset

1	Date	Accretion/Interest Income	Unguaranteed Residual Asset Balance
2	January 1, 2019
3	December 31, 2019
4	December 31, 2020
5	December 31, 2021
6	December 31, 2022
7	December 31, 2023

General Journal

4a. Prepare journal entries for Edom, the lessor, for the year 2019.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11

4b. Prepare journal entries for Edom, the lessor, for the year 2020.

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

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