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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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Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor $375,000 (useful life is 5 years). The fair value of the equipment is $400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of $20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments.

Required:

  1. 1. Show how Lessor should compute the annual rental amounts.
  2. 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor.
  3. 3. Prepare a table showing the accretion of the unguaranteed residual asset.
  4. 4. Prepare the journal entries for Lessor for the years 2019, 2020, and 2021.

1.

To determine

Compute the annual rental amounts for lessor.

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’.

Compute the annual rental amounts for lessor:

Anuual rental amount= Cost of the equipment-PV of the unguranteed residual value PVfactor�

2.

To determine

Prepare the table summarizing the lease and interest receipts that would be suitable for the lessor.

3.

To determine

Prepare an accretion schedule for the unguaranteed residual asset.

4.

To determine

Prepare the journal entries for lessor for the years 2019, 2020, and 2021.

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