entries on the lessee\'s books to refiect the signing of the lease agreement and

ID: 2409316 • Letter: E

Question

entries on the lessee's books to refiect the signing of the lease agreement and to record Lessor Entries, Direct- Lease with Option to Purchase) Krauss Leasing Company signs-i lease agreement on January 1, 2011, to lease electronic equipment to Stewart Company. The term intohm nomnaelaaslthis a 2 eaint aidpaynts ae requr t L. Stewart has the option to purchase the at the for $16,000 upon termination of the lease. 2. The equipment has a cost and fair value of $240,000 to Krauss Leasing Company. The useful ecc- nomic life is 2 years, with a salvage value of S16,000. Krauss Leasing Company desires to earn a return of 1091 on its investment. surrounding the costs yet to be incurred by the lessor. Company is required to pay $7,000 each year to the lessor for executory costs. are no

Explanation / Answer

Computation of annual payments

Cost (fair value) of leased asset to lessor $240,000

Less: Present value of salvage value

(residual value in this case)

$16,000 X .82645

(Present value of 1 at 10% for 2 periods) 13,223

Amount to be recovered through lease payments $226,777

Two periodic lease payments $226,777 ÷ 1.73554* $130,667

*Present value of an ordinary annuity of 1 for 2 periods at 10%

KRAUSS LEASING COMPANY (Lessor)

Lease Amortization Schedule

Date

Annual Payment Less Executory Costs

Interest on Lease Receivable

Recovery of Lease Receivable

Lease Receivable

1/1/11

$240,000

12/31/11

$130,667

$24,000

$106,667

133,333

12/31/12

130,667

13,333*

117,334

16,000

$25,142

*Difference of $1 due to rounding.

(a) 1/1/11 Lease Receivable...................... 240,000

Equipment.......................... 240,000

12/31/11 Cash ($130,667 + $7,000)......... 137,667

Executory Costs

Payable............................ 7,000

Lease Receivable.............. 106,667

Interest Revenue............... 24,000

12/31/12 Cash............................................. 137,667