Problem On January 1, 2018, Allied Industries leased a high-performance conveyer
ID: 2336479 • Letter: P
Question
Problem On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $956,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2022, will be $300,000. Negotiations led to the lessee guaranteeing a $340,000 residual value. Equal payments under the finance/sales-type lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 5% interest rate when calculating lease payments Required 1. Prepare the appropriate entries for both Karrier and Allied on January 1,2018, to record the lease 2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2018, related to the lease.Explanation / Answer
Allied (lessor) PV MLP
$200,000*3.546=$709,200
$340,000*0.8227=$279,719
Total PVMLP= $988,919
Conditions for Finance Lesse
Title Transfer: No
Bargain Purchase Option: yes
Lease Term >=75% of economic life = Yes
PVMLP>=FMV= Yes
It is a sales type lease
It is also finance lease from the point of veiw of Karrier
Journal Entries as on 01-01-2018 in books of Allied Industires
Lease Receivable Dr $11,40,000
Unearned Interest revenue $184,000
High peformance Conveyer $956,000
Journal Entry in the books of Karrier
Fixed Asset $11,40,000
To Lease :Liability 9.88.919
To Intterest payable 151,181
31st December Entries -Allied Industries
Un earned Intrest revenue $57,000
Interest Revenue $57,000
31st December 2018 Karrier
Lease Liability $142,200
Interest Expense $ 57,880
To Cash 2,00,000
Depreciation Expense $285,000
To accumulated depreciation $285,000
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