Sweet Company manufactures a check-in kiosk with an estimated economic life of 1
ID: 2589132 • Letter: S
Question
Sweet Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $380,481, and its unguaranteed residual value at the end of the lease term is estimated to be $18,800. National will pay annual payments of $43,600 at the beginning of each year. Sweet incurred costs of $186,200 in manufacturing the equipment and $3,600 in sales commissions in closing the lease. Sweet has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 4%.
A) Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 5,275.)
B) Prepare a 10-year lease amortization schedule for Sweet, the lessor.
C) Prepare all of the lessor’s journal entries for the first year.
(1) Lease receivable $ (2) Sales price $ (3) Cost of sales $Explanation / Answer
(A)
1. PVIF of Annuity due (4, 10) = 8.43533
Annual lease payment = $43600
PV of the lease payments = 43600*8.43533 = $367,780
PV of unguaranteed residual value = 18800*0.67556 = $12,701
Lease receivable = 367780+12701 = $380,481
2. Sales price = $367,780
3. Cost of sales = 186,200 - 12,701 = $173,499
B)
(C) At inception of the lease:
Lease Receivable..................................................... 380481
Cost of Goods Sold................................................. 173499
Sales Revenue................................................... 367780
Inventory............................................................. 186200
(To record the sale and the cost of goods sale)
Selling Expenses..................................................... 3600
Cash..................................................................... 3600
(To record payment of sales commission)
Cash 43600
Lease Receivable................................................. 43600
(To record receipt of the first lease
payment)
End of the 1st year
Interest Receivable...................................................... 13475
Interest Revenue.................................................. 13475
(To record interest income accrued)
LEASE AMORTIZATION SCHEDULE Beginning of Year Payment Interest at 4% Lease receivable adjusted EOY Lease Receivable 1 380481 1 43600 0 43600 336881 2 43600 13475 30125 306756 3 43600 12270 31330 275426 4 43600 11017 32583 242844 5 43600 9714 33886 208957 6 43600 8358 35242 173716 7 43600 6949 36651 137064 8 43600 5483 38117 98947 9 43600 3958 39642 59305 10 43600 2372 41228 18077 End of 10 18800 723 18077 0Related Questions
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