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Intermediate Accounting (Kieso)
Found in: Page 1248

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Short Answer

(Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value) George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $278,072, and its unguaranteed residual value at the end of the lease term is estimated to be $20,000. National will pay annual payments of $40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of $180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(c) Prepare all of the lessor’s journal entries for the first year.

The total debit and credit side of the journal is $ 518,168.

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Step by Step Solution

Meaning of Sale-type lease

In a sales-type lease, the lessor is assumed to be selling a product to the lessee, which necessitates the reporting of a profit or loss on the sale. As a result, at the lease's start date, the following accounting is applied: (a) Recognize assets. (b)Recognize net investment.

Preparing journal entries

Date

Particular

Debit ($)

Credit ($)

Beginning of the Year

Lease Receivable

278,072

Cost of Goods Sold

172,289

Sales Revenue

270,361

Inventory

180,000

(To record the sale and the cost of goods sold in the lease transaction)

Selling Expenses

4,000

Cash

4,000

(To record payment of the initial direct costs relating to the lease)

Cash

40,000

Lease Receivable

40,000

(To record receipt of the first lease payment)

End of the Year

Interest Receivable

23,807

Interest Revenue

23,807

(To record interest earned during the first year of the lease)

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