Question

E21-6 (L04) EXCEL (Lessor Entries; Sales-Type Lease) Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $35,013 at the beginning of each year. The first payment is received on January 1, 2017. Crosley had purchased the machine during 2016 for $160,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Crosley. Crosley set the annual rental to ensure an 11% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Crosley at the termination of the lease.

Answer 1

all transaciton made at the moment the lease begins.

lease receivables 200,001.13 debit

sales revenues 200,001.13 credit

cost of good sold 160,000 debit

inventory 160,000 credit

cash 35,013 debit

lease receivables 35,013 credit

Step-by-step explanation:

Present value of the lease payments

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 35,013.00

time 8

rate 0.11

`35013 * (1-(1+0.11)^(-8) )/(0.11) = PV\\`

PV $200,001.1278

The company will delcare this interest receivables and recognize the sales reveneue

It will also recognize the cost of good sold and decrease in inventory (it is equipment for the lessee but inventory for the lessor)

Then for each payment will recognzie a portion of interest revenue and decrease the lease receivables As the payment is at the beginning there is not interest revenue