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 $31,000, payable at the beginning of each year.

• The interest rate implicit in the lease is 12%. • 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 $162,500, and the fair retail value is approximately $172,500. • 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 $31,000 discounted at 12% is $172,476.47 (the $1 purchase option is ignored as immaterial).

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

There are 9 journal entires for 20116 and 4 for 2017

Thank you for you help

Explanation / Answer

Lease amortization schedule Year Annual Payment Factor Present worth Interest 0 31000 1 31000 0 1 31000 0.892857143 27678.5714 3321.429 2 31000 0.797193878 24713.0102 6286.99 3 31000 0.711780248 22065.1877 8934.812 4 31000 0.635518078 19701.0604 11298.94 5 31000 0.567426856 17590.2325 13409.77 6 31000 0.506631121 15705.5648 15294.44 7 31000 0.452349215 14022.8257 16977.17 8 Total 172476.453 Amount in $ Date General Journal Debit Credit January 1 2016 Lease Receivable 172500 Profit on sale of Leased asset 10000 Leased asset 162500 To record the inception of lease January 1 2016 Cash 31000 Lease Receivable 31000 To record the receipt of annual Payment towards lease December 31, 2016 Lease receivable 3321.43 Interest revenue 3321.43 To record the interest revenue in lease transaction. January 1 2017 Cash 31000 Lease receivable 31000 To record the receipt of annual Payment towards lease December 31, 2017 Lease receivable 6286.99 Interest revenue 6286.99 To record the interest revenue in lease transaction.

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