Exercise 21A-6 a-b (Part Level Submission) Larkspur Leasing Company signs a leas

Question

Exercise 21A-6 a-b (Part Level Submission) Larkspur Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Crane Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. Crane has the option to purchase the equipment for $26,500 upon termination of the lease. It is not reasonably certain that Crane will exercise this option 2. The equipment has a cost of $330,000 and fair value of $368,000 to Larkspur Leasing. The useful economic life is 2 years, with a residual value of $26,500 3, Larkspur Leasing desires to earn a return of 5% on its investment. 4. Collectibility of the payments by Larkspur Leasing is probable Click here to view the factor table

Explanation / Answer

SOLUTION

Present value of salvage value = Salvage value * Present value of a lump sum

= $26,500 * 0.90703

= $24,036

Cost of equipment = Fair value - Salvage Value

= $368,000 - $24,036 = $343,964

Present value of an annuity of equipment = Equipment cost / Present value of an annuity

= $343,964 / 1.85941 = $184,985

Amortization Schedule-

Journal Entries-

Year Annual Payments ($) (A) Interest on lease receivable($) (B=D*5%) Recovery of lease receivable ($) (C=A-B) Lease Receivable ($) (D) 0 368,000 1 184,985 18,400 166,585 201,415 2 184,985 10,070 174,915 26,500

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