Alexis Computer Company manufactures and sells or leases various types of comput

Question

Alexis Computer Company manufactures and sells or leases various types of computer equipment. On 1/1/17, Alexis leased a complete computer system to Edgar Enterprises.  Data relating to the lease follow:

                Cost of equipment to Alexis                                       $ 80,000

                Fair market value of equipment at 1/1/17                   $ 98,000

                Useful life of equipment                                               8 years

                Lease term 5 years

                Residual value at the end of the lease

                    (notguaranteed by Edgar)                                    $ 15,000

                Implicit and incremental interest rates                               10%

                Initial direct costs incurred in negotiation                    $   1,000

Both the lessor and lessee use straight-line depreciation and have accounting periods that end on 12/31.

        Required:

a. Calculate the yearly payment that Alexis will charge Edgar under this lease agreement if payments are made on 1/1 of each year, beginning 1/1/17.

        b.     Prepare all journal entries that would be made by Alexis (lessor) during 2017 and 2018 relating to this lease.

        c.     Prepare all journal entries that would be made by Edgar (lessee) during 2017 and 2018 relating to this lease.

        d.     Prepare the journal entries made by both Alexis and Edgar with respect to the lease termination if the actual residual value of the computer equipment is $12,500.

Explanation / Answer

Requirement a. Yaer CF 10% PV 1 $ 25,852 0.909091 $ 23,502 2 $ 25,852 0.826446 $ 21,365 3 $ 25,852 0.751315 $ 19,423 4 $ 25,852 0.683013 $ 17,657 5 $ 25,852 0.620921 $ 16,052 $ 98,000 Yearly payment is $ 25,852/- Requirement b. 2017 lease receivables 98000 To Equiment 80000 To Gain on sale of asset 18000 (being equipment leased on finance lease) Cash/bank $ 25,852 To Lease receivables $ 23,502 To Interest income $    2,350 (Being lease payment received) 2018 Cash/bank $ 25,852 To Lease receivables $ 21,365 To Interest income $    4,487 (Being lease payment received) Requirement c. 2017 Equipment 98000 To Lease payable 98000 (Being asset purchased) Lease payable $ 23,502 Interest expenses $    2,350 To Cash/bank $ 25,852 (Being lease payment made) 2018 Lease payable $ 21,365 Interest expenses $    4,487 To Cash/bank $ 25,852 (Being lease payment made) Requirement d. Alexi Cash/bank $ 36,305 To Interest Income $ 13,762 To Lease receiable $ 22,542 (being last payment received) Edgar Lease payable $ 22,542 Interest expenses $ 13,762 To Cash/bank $ 36,305 (being last payment made) Yaer CF 10% PV 1 $ 23,805 0.909091 $ 21,641 2 $ 23,805 0.826446 $ 19,673 3 $ 23,805 0.751315 $ 17,885 4 $ 23,805 0.683013 $ 16,259 5 $ 23,805 0.620921 $ 14,781 5 $ 12,500 0.620921 $    7,762 $ 98,000

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