Concept explainers
1.
Record the lease and the receipt of the second and third instalments of $2,000 in Company A’s books of accounts.
1.
Explanation of Solution
Lease: Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Sale type Lease: In a Sales-Type lease, the lessor sells the asset to the lessee and records a receivable. In this type of lease, the lessor records a dealer’s or manufacturer’s profit or loss depending upon the difference between the fair value of the asset and the carrying value of the asset.
Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and
stockholders’ equities . - Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Record the lease and the receipt of the second and third instalments of $2,000 in Company A’s books of accounts:
Summary Table | |||
Lessee Company | |||
Lease payment required | Interest at 1% 0n Unpaid Obligation | Balance of Lease Obligation | |
Lessor Company | |||
Date | Lease Rental Collected | Interest at 1% on Net Investment | Net Investment |
Beginning of 1st month | $60,817 | ||
Beginning of 1st month | $2,000 | $0 | $58,817 |
End of 1st month | 0 | $588 | $59,405 |
Beginning of 2nd month | $2,000 | 0 | $57,405 |
End of 2nd month | 0 | $574 | $57,979 |
Beginning of 3rd month | $2,000 | 0 | $55,979 |
End of 3rd month | 0 | $560 | $56,539 |
Table (1)
Notes:
Prepare the
Date | Accounts title and explanation | Post Ref. | Debit($) | Credit($) |
At inception | Lease Receivable | $72,000 | ||
Sales | $60,817 | |||
Unearned Interest: Leases | $11,183 | |||
(To record the sales-type lease at inception) | ||||
At inception | Cost of Asset Leased | $50,000 | ||
Speciality Equipment | $50,000 | |||
(To record the cost of the asset leased) | ||||
Initial receipt | Cash | $2,000 | ||
Lease Receivable | $2,000 | |||
(To record the receipt of lease payment) | ||||
At the end of 1st month | Unearned Interest: Leases | $588 | ||
Interest Revenue | $588 | |||
(To recognize the interest revenue of the year) | ||||
Second instalment | Cash | $2,000 | ||
Lease Receivable | $2,000 | |||
(To record the receipt of lease payment) | ||||
At the end of 2nd month | Unearned Interest: Leases | $574 | ||
Interest Revenue | $574 | |||
(To recognize the interest revenue of the year) | ||||
Third instalment | Cash | $2,000 | ||
Lease Receivable | $2,000 | |||
(To record the receipt of lease payment) | ||||
At the end of 3rd month | Unearned Interest: Leases | $560 | ||
Interest Revenue | $560 | |||
(To recognize the interest revenue of the year) |
Table (2)
2.
Record the lease and the payment of the second and third instalments of $2,000 in Company B’s books of accounts and monthly
2.
Explanation of Solution
Compute the present value of the lease payments:
Prepare the journal entries to record the lease and the receipt of the second and third instalments of $2,000 in Company B’s books of accounts:
Date | Accounts title and explanation | Post Ref. | Debit($) | Credit($) |
At Inception | Leased Equipment | $60,817 | ||
Capital Lease Obligation | $60,817 | |||
(To record thecapital lease at inception) | ||||
Initial payment | Capital Lease Obligation | $2,000 | ||
Cash | $2,000 | |||
(To record the capital lease payment) | ||||
At the end of 1st month | Depreciation Expense-Lease Equipment | $1,689 | ||
| $1,689 | |||
(To record the depreciation expense of the year) | ||||
At the end of 1st month | Interest Expense | $588 | ||
Accrued Interest on capital lease obligation | $588 | |||
(To record the interest expense of the lease ) | ||||
Second instalment | Capital Lease Obligation | $1,412 | ||
Accrued interest on capital lease obligation | $588 | |||
Cash | $2,000 | |||
(To record the capital lease payment) | ||||
At the end of 2nd month | Depreciation Expense-Lease Equipment | $1,689 | ||
Accumulated depreciation-Equipment | $1,689 | |||
(To record the depreciation expense of the year) | ||||
At the end of 2nd month | Interest Expense | $574 | ||
Accrued Interest on capital lease obligation | $574 | |||
(To record the interest expense of the lease ) | ||||
3rd instalment | Capital Lease Obligation | $1,426 | ||
Accrued interest on capital lease obligation | $574 | |||
Cash | $2,000 | |||
(To record the capital lease payment) | ||||
At the end of 3rd month | Depreciation Expense-Lease Equipment | $1,689 | ||
Accumulated depreciation-Equipment | $1,689 | |||
(To record the depreciation expense of the year) | ||||
At the end of 3rd month | Interest Expense | $560 | ||
Accrued Interest on capital lease obligation | $560 | |||
(To record the interest expense of the lease ) |
Table (3)
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Chapter 20 Solutions
Intermediate Accounting: Reporting and Analysis (Looseleaf)
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