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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Lessor Accounting Issues Rexon Company leases non-specialized equipment to Ten-Care Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

1. The lease term is 8 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.

2. The cost of the equipment is $500,000. The equipment has an estimated life of 8 years and has a zero estimated value at the end of that time.

3. The equipment has a fair value of $500,000.

4. Ten-Ore agrees to pay all executory costs directly to a third party.

5. The lease contains no renewal or bargain purchase option.

6. The interest rate implicit in the lease is 14%.

7. The initial direct costs are insignificant and assumed to be zero.

8. It is probable that Rexon will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

Required:

  1. 1. Next Level Assuming that the lease is a sales-type lease from Rexon’s point of view, calculate the amount of the equal rental receipts.
  2. 2. Prepare a table summarizing the lease receipts and interest income earned by Rexon.
  3. 3. Prepare journal entries for Rexon for the years 2019 and 2020.

1.

To determine

Compute the amount of the equal rental receipts.

Explanation

Lease: Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

Sale type Lease: In a Sales-Type lease, the lessor sells the asset to the lessee and records a receivable. In this type of lease, the lessor records a dealer’s or manufacturer’s profit or loss depending upon the difference between the fair value of the asset and the carrying value of the asset.

Compute the amount of the equal rental receipts:

Rental Receipt = Fair value of the asset

2.

To determine

Prepare a table that summarizing the lease receipts and interest income earned by Company R

3.

To determine

Prepare the journal entries for Company R for the years 2019 and 2020.

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