Salome Company is a dealer in equipment. On January 1,2020, the entity leased an equipment to another entity. The lease is appropriately recorded as a sales type lease.
Annual rental payable at the beginning of each year 800,000
Lease term 8 years
Useful life of equipment 10 years
Cost of equipment 3,100,000
Purchase option 400,000
Implicit interest rate 10%
PV of an
PV of 1 at 10% for 8 periods 0.47
It is reasonably certain that the lessee will exercise the purchase option on the expiration of lease on December 31,2027.
The perpetual inventory system is used by Salome Company.
Required:
- Determine the unearned interest income on January 1,2020.
- Determine the gross profit on sale.
- Prepare journal entries for 2020 and 2021.
- Prepare
journal entry on December 31,2027 to record the exercise of the bargain purchase option by the lessee. - Prepare journal entry on December 31,2027, if the bargain purchase option is not exercised by the lessee and the fair value of the leased asset is P250,000.
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