Charlotte Corp., a machinery dealer, leased a machine to Eleanor Corp. on January 1, 2022. The lease is for an 8-year period, is noncancelable and requires equal annual payments of $35,013 at the beginning of each year. The first payment is received on January 1, 2022. Charlotte had purchased the machine during 2021 for $160,000. The FMV of the machine is 200,000. The present value of the minimum lease payments is also $200,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Charlotte. Charlotte set the annual rental to ensure an 11% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Charlotte at the termination of the lease. Required: What type of lease is this for Charlotte (lessor) and why Prepare all of Charlotte’s journal entries for 2022.
Charlotte Corp., a machinery dealer, leased a machine to Eleanor Corp. on January 1, 2022. The lease is for an 8-year period, is noncancelable and requires equal annual payments of $35,013 at the beginning of each year. The first payment is received on January 1, 2022. Charlotte had purchased the machine during 2021 for $160,000. The FMV of the machine is 200,000. The present value of the minimum lease payments is also $200,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Charlotte. Charlotte set the annual rental to ensure an 11% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Charlotte at the termination of the lease. Required: What type of lease is this for Charlotte (lessor) and why Prepare all of Charlotte’s journal entries for 2022.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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- Charlotte Corp., a machinery dealer, leased a machine to Eleanor Corp. on January 1, 2022. The lease is for an 8-year period, is noncancelable and requires equal annual payments of $35,013 at the beginning of each year. The first payment is received on January 1, 2022. Charlotte had purchased the machine during 2021 for $160,000. The FMV of the machine is 200,000. The present value of the minimum lease payments is also $200,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Charlotte. Charlotte set the annual rental to ensure an 11%
rate of return . The machine has an economic life of 10 years with no residual value and reverts to Charlotte at the termination of the lease.
Required:
- What type of lease is this for Charlotte (lessor) and why
- Prepare all of Charlotte’s
journal entries for 2022.
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