On January 1, 2018, Allied Industries leased a high-performance conveyer to Karr
ID: 2413902 • Letter: O
Question
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 $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 5% interest rate when calculating lease payments.
Required:
1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2018, to record the lease.
2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2018, related to the lease.
Explanation / Answer
In the books of Karrier
Journal entries
Date
Particulars
Debit ($)
Credit ($)
01-01-18
Conveyor on Lease
975589
Allied Industries
975589
(Being the high performance conveyor taken on lease)
31-12-18
Finance charge (975589 x 5%)
48779.45
Allied Industries
48779.45
(Being finance charges recorded on lease)
31-12-18
Profit and loss account
48779.45
Finance charge (975589 x 5%)
48779.45
(Being finance charges adjusted against the profit and loss account)
31-12-18
Allied Industries
200000
Bank
200000
(Being the annul lease payment made)
In the books of Allied
Journal entries
Date
Particulars
Debit ($)
Credit ($)
01-01-18
Karrier Company
975589
Conveyor on lease
975589
(Being the conveyor given on lease)
31-12-18
Karrier Company (975589 x 5%)
48779.45
Interest on lease
48779.45
(Being the interest on outstanding lease amount recorded)
31-12-18
Interest on lease
48779.45
Profit and loss account
48779.45
(Being interest is credited to the profit and loss account)
31-12-18
Bank
200000
Karrier Company
200000
(Being the annul lease payment received)
Workings:
Present value of lease for lessor and the lessee
Year
(A): Annual lease / Guaranteed residual value
(B): PV factors @5% p.a.
Present value of lease (A x B)
1
200000
0.952381
190476.2
2
200000
0.907029
181405.9
3
200000
0.863838
172767.5
4
200000
0.822702
164540.5
5
340000
0.783526
266398.9
Present value of lease
975589
In the books of Karrier
Journal entries
Date
Particulars
Debit ($)
Credit ($)
01-01-18
Conveyor on Lease
975589
Allied Industries
975589
(Being the high performance conveyor taken on lease)
31-12-18
Finance charge (975589 x 5%)
48779.45
Allied Industries
48779.45
(Being finance charges recorded on lease)
31-12-18
Profit and loss account
48779.45
Finance charge (975589 x 5%)
48779.45
(Being finance charges adjusted against the profit and loss account)
31-12-18
Allied Industries
200000
Bank
200000
(Being the annul lease payment made)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.