Textbook Problem

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.