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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 Guaranteed Residual Value Use the information for Edom Company in E20-8, except that the residual value was guaranteed by Davis Company (the lessee).

Required:

  1. 1. Assuming that the lease is a sales-type lease, calculate the selling price.
  2. 2. Prepare a table summarizing the lease receipts and interest income earned by Edom.
  3. 3. Prepare journal entries for Edom tor the years 2019 and 2020.

1

To determine

Compute the selling price of the initial investment.

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 selling price of the initial investment:

Initial Present Value of teh Investment = (PV of lease payments(selling price)

2

To determine

Prepare a table that summarizing the lease receipts and interest revenue earned by Company E for the 4 year lease term.

3

To determine

Prepare the journal entries for 2019 and 2020 for Company E.

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