Question

Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1. 1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey. 2. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year. 3. The discount rate is 10%, which is implicit in the lease. Garvey knows this rate. 4. The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000. 5. The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets. Required: Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of $200,000. ​

Answer 1

Jan.1

Dr Lease Receivable $250,000

Cr Sales Revenue $250,000

Jan. 1

Dr Cost of Goods Sold $200,000

Cr Equipment Leased to Others $200,000

Dec. 31

Dr Cash $65,949.37

Cr Lease Receivable $40,949.37

Cr Interest Income $25,000

Step-by-step explanation:

Preparation of the journal entries that Richie Company (the lessor) would make in the first year of the lease

Jan.1

Dr Lease Receivable $250,000

Cr Sales Revenue $250,000

Jan. 1

Dr Cost of Goods Sold $200,000

Cr Equipment Leased to Others $200,000

Dec. 31

Dr Cash $65,949.37

Cr Lease Receivable $40,949.37

Cr Interest Income $25,000

($250,000*10%)