Lessee and lessor; lessee guaranteed residual value
• LO15–2, LO15–6
On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $956,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2022, will be $300,000. Negotiations led to the lessee guaranteeing a $340,000 residual value.
Equal payments under the finance/sales-type lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 5% interest rate when calculating lease payments.
Required:
- 1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2018, to record the lease.
- 2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2018, related to the lease.
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