Textbook Problem

Determining Type of Lease and Subsequent Accounting Ravis Rent-A-Car Company leases a car to Ira Reem, an employee, on January 1, 2019. The term of the noncancelable lease is 4 years. The following information about the lease is provided:

1. 1. Title to the car passes to Ira on the termination of the lease with no additional payment required by the lessee.
2. 2. The cost and fair value of the car is $8,400. The car has an economic life of 5 years.
3. 3. The interest rate implicit in the lease is 10%.
4. 4. It is probable that Ravis will collect the lease payments.
5. 5. Equal annual lease payments are due at the end of each year.

Required:

1. 1. What type of lease is this to Ravis Rent-A-Car Company? Why?
2. 2. Prepare a table summarizing the lease receipts and interest income earned by the Ravis Rent-A-Car for the 4-year lease term.
3. 3. Prepare the journal entries for 2019 and 2020 to record the lease agreement, the lease receipts, and the recognition of income on the books of Ravis Rent-A-Car.