On January 1, 2016, Ballieu Company leases specialty equipment with an economic

Question

On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

• The lease is noncancelable and has a term of 8 years. • The annual rentals are $32,900, payable at the beginning of each year.

• The interest rate implicit in the lease is 10%.

• Anderson agrees to pay all executory costs and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2024.

• The cost of the equipment to the lessor is $157,000, and the fair retail value is approximately $193,100.

• The lessor incurs no material initial direct costs.

• The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.

• The lessor estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

The lessor calculates that the present value on January 1, 2016 of 8 annual payments in advance of $32,900 discounted at 10% is $193,070.99 (the $1 purchase option is ignored as immaterial).

Required:

1. Next Level Identify the classification of the lease transaction from Ballieu’s point of view.

2. Prepare all the journal entries for Ballieu for the years 2016 and 2017.

Explanation / Answer

It will be classified as Finance lease Transaction:- a. The lease term is for the major part of the economic life of the unbderlying asse, even if tittle is not transferred and in given cases lease term is 8year and economic life of Asset is also 8 year Berne Company (Lesser) b. The fair retail value is approximately equivalent to the Net ivestment value of the lease. Lease Amortization Schedule Date Annual Lease Rent Received Interest Revenue@10% Reduction of Lease Receivable Lease Receivable Journal Entry in the books of BallieuCompany 01/01/2016 $193,071 Date Account & Explanation Debit Credit 01/01/2016 $32,900 $32,900 $160,171 01/01/2016 Lease Receivable $193,071.00 31/12/2017 $32,900 $16,017 $16,883 $143,288 Cost of Goods Sold $157,000.00 31/12/2018 $32,900 $14,329 $18,571 $124,717 Sales $193,071.00 31/12/2019 $32,900 $12,472 $20,428 $104,289 Inventory $157,000.00 31/12/2019 $32,900 $10,429 $22,471 $81,817 To Record Sale and Lease Receivable 31/12/2020 $32,900 $8,182 $24,718 $57,099 31/12/2021 $32,900 $5,710 $27,190 $29,909 01/01/2016 Cash $32,900.00 31/12/2022 $32,900 $2,991 $29,909 $0 Lease Receivable $32,900.00 To Record First Annual Lease Rental 31/12/2016 Interest Receivable $16,017.00 Interest Revenue $16,017.00 To Record Interest Revneue 01/01/2017 Cash $32,900.00 Lease Receivable $16,017.00 Interest Receivable $16,883.00 To Record second Annual Lease Rental Received 31/12/2017 Interest Receivable $14,329.00 Interest Revenue $14,329.00 To Record Interest Revneue 01/01/2017 Cash $32,900.00 Lease Receivable $14,329.00 Interest Receivable $18,571.00 To Record second Annual Lease Rental Received

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