A lessor entered into a lease with the following terms under the lease agreement

Question

A lessor entered into a lease with the following terms under the lease agreement. The lease term is eight years. The lessor is to receive equal annual payments over the term of the lease. The leased property reverts to the lessor upon termination of the lease. The lease begins on January 1, 20X5. Payments are due on December 31 of each year for the duration of the lease term. The cost of the equipment being leased is $160,000. It has an estimated useful life of ten years. The list price of the equipment is $240,000 if it was purchased by the customer. Both the lessor and the lessee have agreed that the equipment will have a residual value of $ 10,000 at the end of the lease. The residual value is not guaranteed. The lessor expects a return on 10% on its leases. There are no uncertainties related to the lease agreement for the lessor. REQUIRED: Calculate the amount of each annual payment that the lessor will receive based upon the desired rate of return, using the list price as the present value of the equipment being leased. Round your answer to the nearest whole dollar. Prepare an amortization schedule for the lessor. Round all calculations to the nearest whole dollar. Prepare all necessary journal entries, in proper general journal form that be required on the lessor's books for the year ending December 31, 20X5. Provide an explanation for each entry made.

Explanation / Answer

1 Present Value of the lease = ((PMT*((1-(1+r)^-n)/r)) ie. 240000= ((PMT*((1-(1+0.10)^-8)/0.10)) Solving in an online equation solver, we get the annual year-end payment to be 44986.60 ie. 44987 2 Year Annual Year -end payment Towards interest Towards Principal Principal Balance 0 - - - 240,000 1 44,987 24,000 20,987 219,013 2 44,987 21,901 23,086 195,927 3 44,987 19,593 25,394 170,533 4 44,987 17,053 27,934 142,599 5 44,987 14,260 30,727 111,872 6 44,987 11,187 33,800 78,072 7 44,987 7,807 37,180 40,893 8 44,987 4,089 40,898 -5 Total 359,896 119,891 240,005 3.Journal entries for the lessor Date Account Title Debit Credit 01-Jan-15 Lease Receivable 240000 Cost of Goods Sold 160000 Inventory 160000 Sales 240000 (To record the lease.) 31/12/2015 Cash 44987 Lease Receivable 44987 (To record the first lease payment.) 31-Dec-15 Interest Receivable 24000 Interest Revenue 24000 (Int. @ 10% for 240000)

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