Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year. 2. The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom. 3. Davis agrees to pay all executory costs directly to a third party. 4. The interest rate implicit in the lease is 14%. 5. The initial direct costs are insignificant and assumed to be zero. 6. It is probable that Edom will collect the lease payments. Required: 1 Prepare a table summarizing the lease receipts and interest income earned by Edom. 2. Prepare a table showing the accretion of the unguaranteed residual asset. 3. Prepare journal entries for Edom, the lessor, for the years 2019 and 2020. Edom Company General Ledger ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 123 Equipment Leased to Others 124 Unguaranteed Residual Asset 141 Inventory 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 231 Salaries Payable 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 433 Interest Income EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 559 Miscellaneous Expenses 910 Income Tax Expense Edom Company Summary of Lease Payments Received and Interest Income Earned 1 Date Annual Lease Payments Received Interest Income at 14% on Lease Receivable Lease Receivable 2 January 1, 2019 3 January 1, 2019 4 December 31, 2019 5 January 1, 2020 6 December 31, 2020 7 January 1, 2021 8 December 31, 2021 9 January 1, 2022 10 December 31, 2022 11 January 1, 2023 3. Prepare a table showing the accretion of the unguaranteed residual asset. Additional Instructions Edom Company Accretion Schedule for Unguaranteed Residual Asset 1 Date Accretion/Interest Income Unguaranteed Residual Asset Balance 2 January 1, 2019 3 December 31, 2019 4 December 31, 2020 5 December 31, 2021 6 December 31, 2022 7 December 31, 2023 General Journal 4a. Prepare journal entries for Edom, the lessor, for the year 2019. General Journal Instructions PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 4b. Prepare journal entries for Edom, the lessor, for the year 2020. PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6
Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and related events are as follows: 1. The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year. 2. The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom. 3. Davis agrees to pay all executory costs directly to a third party. 4. The interest rate implicit in the lease is 14%. 5. The initial direct costs are insignificant and assumed to be zero. 6. It is probable that Edom will collect the lease payments. Required: 1 Prepare a table summarizing the lease receipts and interest income earned by Edom. 2. Prepare a table showing the accretion of the unguaranteed residual asset. 3. Prepare journal entries for Edom, the lessor, for the years 2019 and 2020. Edom Company General Ledger ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 123 Equipment Leased to Others 124 Unguaranteed Residual Asset 141 Inventory 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 231 Salaries Payable 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 433 Interest Income EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 559 Miscellaneous Expenses 910 Income Tax Expense Edom Company Summary of Lease Payments Received and Interest Income Earned 1 Date Annual Lease Payments Received Interest Income at 14% on Lease Receivable Lease Receivable 2 January 1, 2019 3 January 1, 2019 4 December 31, 2019 5 January 1, 2020 6 December 31, 2020 7 January 1, 2021 8 December 31, 2021 9 January 1, 2022 10 December 31, 2022 11 January 1, 2023 3. Prepare a table showing the accretion of the unguaranteed residual asset. Additional Instructions Edom Company Accretion Schedule for Unguaranteed Residual Asset 1 Date Accretion/Interest Income Unguaranteed Residual Asset Balance 2 January 1, 2019 3 December 31, 2019 4 December 31, 2020 5 December 31, 2021 6 December 31, 2022 7 December 31, 2023 General Journal 4a. Prepare journal entries for Edom, the lessor, for the year 2019. General Journal Instructions PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 4b. Prepare journal entries for Edom, the lessor, for the year 2020. PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 2 3 4 5 6
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2019. The lease terms, provisions, and related events are as follows:
| 1. | The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year. |
| 2. | The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom. |
| 3. | Davis agrees to pay all executory costs directly to a third party. |
| 4. | The interest rate implicit in the lease is 14%. |
| 5. | The initial direct costs are insignificant and assumed to be zero. |
| 6. | It is probable that Edom will collect the lease payments. |
Required:
| 1 | Prepare a table summarizing the lease receipts and interest income earned by Edom. |
| 2. | Prepare a table showing the accretion of the unguaranteed residual asset. |
| 3. | Prepare |
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Edom Company
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Summary of Lease Payments Received and Interest Income Earned
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Date
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Annual Lease Payments Received
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Interest Income at 14% on Lease Receivable
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Lease Receivable
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January 1, 2019
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January 1, 2019
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December 31, 2019
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December 31, 2020
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December 31, 2021
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December 31, 2022
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January 1, 2023
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3. Prepare a table showing the accretion of the unguaranteed residual asset.
Additional Instructions
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Edom Company
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Accretion Schedule for Unguaranteed Residual Asset
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January 1, 2019
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December 31, 2019
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December 31, 2020
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December 31, 2023
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General Journal
4a. Prepare journal entries for Edom, the lessor, for the year 2019.
General Journal Instructions
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4b. Prepare journal entries for Edom, the lessor, for the year 2020.
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