South Bend Corporation purchased equipment in December 2016 for $150,000. South

Question

South Bend Corporation purchased equipment in December 2016 for $150,000. South Bend leased the equipment to the Kansas Company on January 1, 2017. Lease payments of $43,000 are to be made at the end of each year for six years. The present value of the minimum lease payments at 14% interest is $167,212.72 at the time of the lease. At the end of the lease term, ownership of the equipment will be transferred to Kansas. The collectibility of the lease payments is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.

Answer following:

a. Classify the (be specific) from the South Bend Corporation's standpoint.

b. Prepare the 2017 journal entries regarding the lease for the South Bend Corporation.

Explanation / Answer

Ans a The lease is Capital Lease.as the ownership is transferred to lessee i.e Kansas at the end of the lease period and minimum lease payment exceeds 90% of the fair value of the leased asset.So it is a capital lease for South Bend Corporation and Kansas both. As leased asset is removed from lessor i.e South Bend Corporation in financial lease.

Ans b

In the books of South Bend Corporation Date Accounts Title Dr Cr 1-Jan-17 Lease Payment Receivable (43000*6) $258000 Leased Assets 167212.72 Unearned Interest Revenue 90787.28 (Being lease recoded at the inception of lease) 31-Jan Unearned Interest Revenue(14%*167212.72) 23409.78 Interest Revenue 23409.78 (being interest earned at the end of the year) 31-Jan-17 Cash 43000 Lease Payment Receivable 43000 (Being lease payment received)

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