Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. 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 e Edom. 3. Davis agrees to pay all executory costs. 4. The interest rate implicit in the lease is 14%. 5. The initial direct costs are insignificant and assumed to be zero. 6. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Required: 1. Next Level Determine if the lease is a sales-type or direct financing lease from Edom's point of view (calculate the selling price and assume that this is also the fair value). 2. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor. 3. Prepare journal entries for Edom, the lessor, for the years 2016 and 2017.
Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. 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 e Edom. 3. Davis agrees to pay all executory costs. 4. The interest rate implicit in the lease is 14%. 5. The initial direct costs are insignificant and assumed to be zero. 6. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Required: 1. Next Level Determine if the lease is a sales-type or direct financing lease from Edom's point of view (calculate the selling price and assume that this is also the fair value). 2. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor. 3. Prepare journal entries for Edom, the lessor, for the years 2016 and 2017.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Edcom Company Lease Agreement with Davis Company**
Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, 2016. The lease terms, provisions, and related events are outlined below:
1. **Lease Term and Rental Receipts:**
- Duration: 5 years
- Nature: Noncancelable lease
- Annual rent: $100,000, paid in advance at the beginning of each year
2. **Equipment Cost and Residual Value:**
- Cost: $313,000
- Estimated lifespan: 6 years
- End-of-term: Unguaranteed residual value of $20,000 benefiting Edom
3. **Costs:**
- Davis Company agrees to cover all executory costs.
4. **Interest Rate:**
- Implicit rate in the lease: 14%
5. **Direct Costs:**
- Insignificant and assumed to be zero.
6. **Rental Collectibility:**
- Collectibility is reasonably assured with no significant uncertainties about unreimbursable costs for the lessor.
**Required Analysis:**
1. **Next Level:**
- Determine whether the lease is a sales-type or direct financing lease from Edom’s point of view by calculating the selling price and assuming this is also the fair value.
2. **Financial Table:**
- Prepare a table summarizing lease receipts and interest revenue for the lessor.
3. **Journal Entries:**
- Prepare journal entries for Edom, the lessor, for the years 2016 and 2017.
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