Shamrock Leasing Company signs a lease agreement on January 1, 2017, to lease el

Question

Shamrock Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Pharoah Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

4. Collectibility of the payments by Shamrock Leasing is probable.

Prepare the journal entries on the books of Shamrock Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.

(PLEASE show your work so I can understand. There should be 3 journal entries. Thank you! )

1. Pharoah has the option to purchase the equipment for $23,000 upon termination of the lease. It is not reasonably certain that Pharoah will exercise this option. 2. The equipment has a cost of $260,000 and fair value of $290,000 to Shamrock Leasing. The useful economic life is 2 years, with a residual value of $23,000. 3. Shamrock Leasing desires to earn a return of 5% on its investment.

4. Collectibility of the payments by Shamrock Leasing is probable.

Prepare the journal entries on the books of Shamrock Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.

(PLEASE show your work so I can understand. There should be 3 journal entries. Thank you! )

Explanation / Answer

SOLUTION

Present value of salvage value = Salvage value * Present value of a lumpsum

= $23,000 * 0.90702 = $20,861

Cost of equipment = $260,000,- $20,861 = $239,139

Present value of an annuity of equipment = Equipment cost / Present value of an annuity

= $239,139 / 1.85941 = $128,610

Lease amortization schedule-

Date Account titles and Explanation Debit ($) Credit ($) 1/1/2017 Lease receivable 260,000 Cash 260,000 (To record lease) 12/31/2017 Cash 128,610 Lease receivable 115,610 Interest revenue 13,000 (To record interest revenue) 12/31/2018 Cash 128,610 Lease receivable 121,390 Interest revenue 7,220 (To record interest revenue)

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