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Q. 21-7BE

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Intermediate Accounting (Kieso)
Found in: Page 1240

Short Answer

Use the information for IBM from BE21-6. Assume the direct-financing lease was recorded at a present value of $150,000. Prepare IBM’s December 31, 2017, entry to record interest.

Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of $30,044 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 $150,000. 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 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.

Interest Revenue is $9,596

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Step by Step Solution

Meaning of Interest revenue

Interest revenue is the income earned by trade from any investments it makes or the debt it holds. Interest revenue can be found by deducting present value with rental payments. The difference amount is multiplied by the implicit interest rate

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Interest Receivable

9,596

Interest Revenue

9,596

Working Notes:-

Calculation of Interest revenue

Most popular questions for Business-studies Textbooks

Question: (Balance Sheet and Income Statement Disclosure—Lessee) The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.

Inception date

October 1, 2017

Lease term

6 years

Economic life of leased equipment

6 years

Fair value of asset at October 1, 2017

$300,383

Residual value at end of lease term

–0–

Lessor’s implicit rate

10%

Lessee’s incremental borrowing rate

10%

Annual lease payment due at the beginning of each year, beginning with October 1, 2017

$62,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $5,500 per year and are to be paid each October 1, beginning October 1, 2017. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

Date

Annual lease payments/Receipt

Interest (10%)

On Unpaid liability/Receivable

Reduction of Lease Liability?

Receivable

Balance of Lease Liability/Receivable

10/01/17

$300,383

10/01/17

$62,700

$62,700

237,683

10/01/18

$62,700

$23,768

38,932

198,751

10/01/19

$62,700

19,875

42,825

155,926

10/01/20

$62,700

15,593

47,107

108,819

10/01/21

$62,700

10,882

51,818

57,001

10/01/22

$62,700

5,699*

57,001

0

$376,200

$75,817

$300,383

*Rounding error is $1.

(b) Assuming the lessee’s accounting period ends on December 31, answer the following questions with respect to this lease agreement.

(4) What items and amounts will appear on the lessee’s balance sheet at December 31, 2018?

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