Question

Ayayai Corporation leases equipment from Falls Company on January 1, 2020. The lease agreement does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. It covers 3 years of the equipmentâs 8-year useful life, and the present value of the lease payments is less than 90% of the fair value of the asset leased. The annual lease payment is $49,000 at the beginning of each year, and Ayayaiâs incremental borrowing rate is 7%, which is the same as the lessorâs implicit rate.

Required:
Prepare all the necessary journal entries for Falls Company (the lessor) for 2020, assuming the equipment is carried at a cost of $232,000.

Answer 1

January 1, 2020

Dr Cash $49,000

Cr Unearned revenue $49,000

December 31, 2020

Dr Unearned revenue $49,000

Cr Lease revenue $49,000

December 31, 2020

Dr Depreciation expense $29,000

Cr Accumulated depreciation, equipment $29,000

Step-by-step explanation:

Preparation of all the necessary journal entries for Falls Company (the lessor) for 2020

January 1, 2020

Dr Cash $49,000

Cr Unearned revenue $49,000

December 31, 2020

Dr Unearned revenue $49,000

Cr Lease revenue $49,000

December 31, 2020

Dr Depreciation expense $29,000

Cr Accumulated depreciation, equipment $29,000

($232,000 / 8 years )