Problem 21-10 Cheyenne Company manufactures a check-in kiosk with an estimated e
ID: 2798402 • Letter: P
Question
Problem 21-10 Cheyenne 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 $280,968, and its unguaranteed residual value at the end of the lease term is estimated to be $19,300. National will pay annual payments of $39,000 at the beginning of each year and all maintenance, insurance, and taxes. Cheyenne incurred costs of $197,000 in manufacturing the equipment and $4,300 in negotiating and closing the lease. Cheyenne has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 9%.
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 answer to 0 decimal places e.g. 58,971.)
Prepare a 10-year lease amortization schedule.
Prepare all of the lessor’s journal entries for the first year.
(1) Lease receivable_____Explanation / Answer
(a) The lease is a sales-type lease because: (1) the lease term exceeds 75% of the asset’s estimated economic life, (2) collectibility of payments is reasonably assured and there are no further costs to be incurred, and (3) Cheyenne Company realized an element of profit aside from the financing charge.
1. Present value of an annuity due of $1 for
10 periods discounted at 9%...................................... 6.99525
Annual lease payment..................................................... X $ 39,000
Present value of the 10 rental payments...................... 272,815
Add present value of estimated residual
value of $19,300 in 10 years at 9%
($19,300 X .42241) ........................................................ 8,153
Lease receivable at inception......................................... $280,968
2. Sales price is $272,815 (the present value of the 10 annual lease payments); or, the initial PV of $280,968 minus the PV of the unguaranteed residual value of $8,153.
3. Cost of sales is $188,847 (the $197,000 cost of the asset less the present value of the unguaranteed residual value).
(b) CHEYENNE COMPANY (Lessor)
Lease Amortization Schedule
Annuity Due Basis, Unguaranteed Residual Value
Beginning of Year
Annual Lease Payment Plus Residual Value
Interest (9%) on Lease Receivable
Lease Receivable Recovery
Lease Receivable
(a)
(b)
(c)
(d)
Initial PV
$ 0
$ 0
$ 0
$280,968
1
39,000
0
39,000
241,968
2
39,000
21,777
17,223
224,745
3
39,000
20,227
18,773
205,972
4
39,000
18,537
20,463
185,510
5
39,000
16,696
22,304
163,206
6
39,000
14,688
24,312
138,894
7
39,000
12,500
26,500
112,395
8
39,000
10,116
28,884
83,510
9
39,000
7,516
31,484
52,026
10
39,000
4,682
34,318
17,708
End of 10
19,300
* 1,592*
17,708
0
$409,300
*$128,332
$280,968
*Rounding error is $2.00.
(a) Annual lease payment required by lease contract.
(b) Preceding balance of (d) X 9%, except beginning of first year of lease term.
(c) (a) minus (b).
(d) Preceding balance minus (c).
(c) Beginning of the Year
Lease Receivable..................................................... 280,968
Cost of Goods Sold................................................. 188,847
Sales Revenue................................................... 272,815
Inventory............................................................. 197,000
(To record the sale and the cost of goods
sold in the lease transaction)
Selling Expenses..................................................... 4,300
Cash..................................................................... 4,300
(To record payment of the initial direct
costs relating to the lease)
Cash............................................................................... 39,000
Lease Receivable................................................. 39,000
(To record receipt of the first lease
payment)
End of the Year
Interest Receivable...................................................... 21,777
Interest Revenue.................................................. 21,777
(To record interest earned during the
first year of the lease)
Beginning of Year
Annual Lease Payment Plus Residual Value
Interest (9%) on Lease Receivable
Lease Receivable Recovery
Lease Receivable
(a)
(b)
(c)
(d)
Initial PV
$ 0
$ 0
$ 0
$280,968
1
39,000
0
39,000
241,968
2
39,000
21,777
17,223
224,745
3
39,000
20,227
18,773
205,972
4
39,000
18,537
20,463
185,510
5
39,000
16,696
22,304
163,206
6
39,000
14,688
24,312
138,894
7
39,000
12,500
26,500
112,395
8
39,000
10,116
28,884
83,510
9
39,000
7,516
31,484
52,026
10
39,000
4,682
34,318
17,708
End of 10
19,300
* 1,592*
17,708
0
$409,300
*$128,332
$280,968
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