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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 with Receipts at End of Year Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

  1. 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $50,000 to be made at the end of each year.
  2. 2. The equipment costs $130,000. The equipment has an estimated life of 4 years and an estimated residual value at the end of the lease term of zero.
  3. 3. Fox agrees to pay all executory costs directly to a third party.
  4. 4. The interest rate implicit in the lease is 12%.
  5. 5. The initial direct costs are insignificant and assumed to be zero.
  6. 6. The collectability of the rentals is reasonably assured.

Required:

  1. 1. Next Level Assuming that the lease is a sales-type lease from Berne’s point of view, calculate the selling price and assume that this is also the fair value.
  2. 2. Prepare a table summarizing the lease receipts and interest income earned by Berne.
  3. 3. Prepare journal entries for Berne, the lessor, for the years 2019 and 2020.

1.

To determine

Compute the selling price or fair value of the investment.

Explanation

Sales-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 selling price or fair value of the investment:

Selling price = Lease

2.

To determine

Prepare a table to summarize the lease receipts and interest income earned by Company B.

3.

To determine

Prepare the journal entries to record the transactions for the years 2019 and 2020.

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