Problem 21A-9 a2-c Concord Company manufactures a check-in kiosk with an estimat

Question

Problem 21A-9 a2-c

Concord Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $318,274, and its unguaranteed residual value at the end of the lease term is estimated to be $18,100. National will pay annual payments of $39,500 at the beginning of each year. Concord incurred costs of $182,900 in manufacturing the equipment and $3,900 in sales commissions in closing the lease. Concord has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 6%.

2. Prepare a 10-year lease amortization schedule for Concord, the lessor. (Round answers to 0 decimal places e.g. 5,275.)

3. Prepare all of the lessor’s journal entries for the first year. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 5,275.)

Account Titles and Explanation

Debit

Credit

(To record the sale and the cost of goods sold in the lease transaction.)

(To record payment of the initial direct costs relating to the lease.)

(To record receipt of the first lease payment.)

(To record interest earned during the first year of the lease.)

Problem 21A-9 a2-c

Concord Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $318,274, and its unguaranteed residual value at the end of the lease term is estimated to be $18,100. National will pay annual payments of $39,500 at the beginning of each year. Concord incurred costs of $182,900 in manufacturing the equipment and $3,900 in sales commissions in closing the lease. Concord has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 6%.

Explanation / Answer

Part 1

(1) Present value of an annuity due of $1 for 10 periods discounted at 6%....... 8.14026

Annual lease payment.........X $ 39500

Present value of the 10 rental payments........ 321,540

Add present value of estimated residual value of $20,000 in 10 years at 6%

($18,100 X 0.55839)...........10107

Lease receivable at inception $331,647 (321540+10107)

(2) Sales price is $321,540 (the present value of the 10 annual lease payments); or, the initial PV of $331,647 minus the PV of the un-guaranteed residual value of $10107.

(3) Cost of sales is $172,793 (the $182,900 cost of the asset less the present value of the unguaranteed residual value 10107).

Part 2

GEORGE COMPANY (Lessor)

Lease Amortization Schedule

Annuity Due Basis, Unguaranteed Residual Value

17529

(292147*6%)

16211

(270176*6%)

14813

(246887*6%)

13332

(222200*6%)

11762

(196032*6%)

10098

(168294*6%)

8334

(138892*6%)

6464

(107726*6%)

4481

(74690*6%)

Part 3

Beginning of year annual lease payment + residual value interest (6%) on lease receivable lease receivable recovery lease receivable Initial PV 331647 1 39500 - 39500 292147 2 39500

17529

(292147*6%)

21971 270176 3 39500

16211

(270176*6%)

23289 246887 4 39500

14813

(246887*6%)

24687 222200 5 39500

13332

(222200*6%)

26168 196032 6 39500

11762

(196032*6%)

27738 168294 7 39500

10098

(168294*6%)

29402 138892 8 39500

8334

(138892*6%)

31166 107726 9 39500

6464

(107726*6%)

33036 74690 10 39500

4481

(74690*6%)

35019 39671 End of 10 18100 (21571) 39671 0 413100 81453 331647

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