Windsor Leasing Company signs a lease agreement on January 1, 2017, to lease ele

Question

Windsor Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Wildhorse 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. Wildhorse has the option to purchase the equipment for $25,500 upon termination of the lease. It is not reasonably certain that Wildhorse will exercise this option. The equipment has a cost of $310,000 and fair value of $363,000 to Windsor Leasing. The useful 2. | 3. 4. economic life is 2 years, with a residual value of $25,500. Windsor Leasing desires to earn a return of 5% on its investment. Collectibility of the payments by Windsor Leasing is probable. Prepare the journal entries on the books of Windsor Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018. Date Account Titles and Explanation Debit Credit

Explanation / Answer

Journal Enteries is given below: Date Account Tittle and Explaination Debit Credit 01-01-2017 Lease Receivable $                         3,63,000 Equipment $                3,63,000 ( To record Lease ) 12/31/2017 Cash $                         1,82,784 Lease Receivable $                1,64,634 Interest Revenue $                    18,150 ( Torecord Interest Revenue) 12/31/2018 Cash $                         1,82,784 Lease Receivable $                1,72,866 Interest Revenue $                      9,918 ( Torecord Interest Revenue) Computation Of annual Payments 1 Fair Value of Lease asset to lessor $                3,63,000 2 Less : Present value of salvage value $                    23,130 ( Salvage value X present value of Lump sum) ( $ 25,500 X 0.90703) (present value of Lump sum = period 2 years, rate 5 % is 0.90703) 3 Cost of Equipment $                3,39,870 4 Two periodic lease payments $                1,82,784 ( Cost of Eqipmet / Present value of an annuity ) ( $339,870 / 1.85941) (present value of annuity = period 2 years, rate 5 % is 1.85941) Lease Ammortisation schedule Year Annual Payment Interest on Lease Receivable Recovery of Lease Receivable Lease Receivable (A) (B) = ( D X 5%) (C) = (A - B) (D) 0 $    3,63,000 1 $                                             1,82,784 $                             18,150 $                1,64,634 $    1,98,366 2 $                                             1,82,784 $                               9,918 $                1,72,866 $        25,500

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