Edom Company, the lessor, enters into a lease with Davis Company to lease equipm
ID: 2548273 • Letter: E
Question
Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. The lease terms, provisions, and related events are as follows:
Required:
Prepare journal entries for Edom, the lessor, for the years 2016 and 2017.
Lease Payments Received and Interest Revenue Earned Summary
2016 - 2020
1
Date
Annual Lease Payments Received
Interest Revenue at 14% on Net Investment
Lease Receivable
Unearned Interest: Leases
Net Investment
2
January 1, 2016
3
January 1, 2016
4
December 31, 2016
5
January 1, 2017
6
December 31, 2017
7
January 1, 2018
8
December 31, 2018
9
January 1, 2019
10
December 31, 2019
11
January 1, 2020
12
December 31, 2020
PAGE 1
GENERAL JOURNAL
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1. The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year. 2. The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom. 3. Davis agrees to pay all executory costs. 4. The interest rate implicit in the lease is 14%. 5. The initial direct costs are insignificant and assumed to be zero. 6. 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.Explanation / Answer
It will be classified as Sale type 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 b. The Net Investment value is differ from carrying Value. Edom Company Lease Amortization Schedule Date Annual Lease Payment Received Interest Revenue at 14% on Net Investment Lease Receivable Unearned Interest Leases net Investment Journal Entry in the books of Edom Company 01/01/2016 $520,000.00 $118,240.80 $401,759.20 Compute the selling price of the Equipment Date Account & Explanation Debit Credit 01/01/2016 $100,000.00 $420,000.00 $118,240.80 $301,759.20 01/01/2016 Lease Receivable $520,000.00 31/12/2016 $100,000.00 $42,246.29 $320,000.00 $75,994.51 $244,005.49 Selling Price of The equipment=$100000*PVIFA(14%, 5 Year) Cost of Goods Sold ($313000-$10388) $302,612.00 31/12/2017 $100,000.00 $34,160.77 $220,000.00 $41,833.74 $178,166.26 =$100000*3.91371 Sales $391,371.20 31/12/2018 $100,000.00 $24,943.28 $120,000.00 $16,890.47 $103,109.53 =391371.2 Unearned interest on Lease $118,240.80 31/12/2019 $100,000.00 $14,435.33 $20,000.00 $2,455.13 $17,544.87 Equipment $313,000.00 31/12/2019 $20,000.00 $2,456.28 $0.00 -$1.15 $1.15 Calculation of Amount of Lease Receivable To Record Equipment taken on Lease Lease Payment+ Residula Value =($100000*5 Year)+$20000 01/01/2016 Cash $100,000.00 =$500000+$20000 Lease Receivable $100,000.00 =520000 To record Annual Lease Rent received Compute the net Investment 31/12/2016 Unearned interest on Lease $42,246.29 Net Investment=Present Value of Lease Payment+ Present Value of Residual Value Interest revenue $42,246.29 =391371.20+$20000*0.5194 To Recored interest Income =$391371.20+$10388 =$401759.20 01/01/2017 Cash $100,000.00 Lease Receivable $100,000.00 To record Annual Lease Rent received 31/12/2017 Unearned interest on Lease $34,160.77 Interest revenue $34,160.77 To Recored interest Income
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