Question

Assume that IBM leased equipment that was carried at a cost of $182,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of $35,685 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $182,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 7%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM.

Prepare IBM’s January 1, 2017, journal entries at the inception of the lease
Date Account Titles & Explnation Debit Credit
January 1
January 1

Answer 1

IBM

Journal entries at the inception of the lease

Date Account Titles & Explanation Debit Credit

January 1

Debit Accounts receivable (Sharon Swander Company) $182,000

Credit Leased Asset $182,000

To record the lease of the asset to Sharon Swander.

January 1

Debit Cash $35,685

Credit Accounts receivable (Sharon Swander Company) $35,685

To record the receipt of the first rental payment.

Step-by-step explanation:

a) Data and Calculations:

Cost of equipment on lease = $182,000

Lease terms:

Lease period = 6 years

Annual rental payments = $35,685

Implicit interest rate = 7%