Question

Assume that IBM leased equipment that was carried at a cost of $92,000 to Carla Vista Company. The term of the lease is 6 years December 31, 2019, with equal rental payments of $18,427 beginning December 31, 2019. The fair value of the equipment at commencement of the lease is $92,001. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title. Collectibility of lease payments for IBM is probable. Assume the sales-type lease was recorded at a present value of $92,001.

Prepare IBM's December 31, 2020, entry to record the lease transaction with Carla Vista Company.

Answer 1

(To record the lease)

Lease Receivable -------- $92,000 (Debit)

Equipment -------- $18,427 (Credit)

(To record the lease first payment)

Cash -------- $92,000 (Debit)

Lease Receivable -------- $18,427 (Credit)

Step-by-step explanation:

Given:

Lease Amount (Present Value) = $92,000

Rental Payment = $18,427

Term of Lease = 6 years

Equipment Useful Life = 6 years

Implicit Interest Rate = 8%

To prepare IBM's December 31, 2020, we'll make use of the following entries.

To record the lease itself:

1. Lease Receivable (Debit)

2. Equipment (Credit)

To record the lease first payment:

3. Cash (Debit)

4. Lease Receivable (Credit)

Only the first lease payment is considered because the commencement date of the lease is December 31, 2019; Between December 31, 2020 and December 31, 2019, only one payment (i.e. the first payment) is expected to have been recorded.

The recorded entry is as follows;

(To record the lease)

Lease Receivable -------- $92,000 (Debit)

Equipment -------- $18,427 (Credit)

(To record the lease first payment)

Cash -------- $92,000 (Debit)

Lease Receivable -------- $18,427 (Credit)