Question

Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions:

1. The lease term is three years and the lessor paid $132,000 to acquire the asset (operating lease).
2. The lease term is six years and the lessor paid $132,000 to acquire the asset. Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 7%.
3. The lease term is six years and the lessor paid $96,000 to acquire the asset.

Answer 1

The appropriate entries for recording the lease, initial payment, and year-end under different assumptions are provided.

Step-by-step explanation:

The appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions are as follows:

1. Assumption 1: Operating Lease (3 years, $132,000 acquisition cost)
   - Record the lease as an operating lease with no initial payment
   - No entries needed at the December 31 fiscal year-end
2. Assumption 2: Capital Lease (6 years, $132,000 acquisition cost, adjusting for initial direct costs)
   - Record the lease as a capital lease with no initial payment but an adjusted net investment
   - Record the initial payment as a reduction of the net investment
   - At the December 31 fiscal year-end, record interest revenue on the net investment and adjust the net investment balance to reflect the reduced effective interest rate
3. Assumption 3: Capital Lease (6 years, $96,000 acquisition cost)
   - Record the lease as a capital lease with no initial payment
   - No entries needed at the December 31 fiscal year-end