Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year. The discount rate is 10%, which is implicit in the lease. Garvey knows this rate. The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000. The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets. Required: Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of $200,000. CHART OF ACCOUNTS Richie Company ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment Leased to Others LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Interest 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 422 Interest Income EXPENSES 511 Insurance Expense 512 Utilities Expense 520 Cost of Goods Sold 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 559 Miscellaneous Expenses 910 Income Tax Expense
Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year. The discount rate is 10%, which is implicit in the lease. Garvey knows this rate. The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000. The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets. Required: Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of $200,000. CHART OF ACCOUNTS Richie Company ASSETS 111 Cash 121 Accounts Receivable 122 Lease Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment Leased to Others LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Interest 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 422 Interest Income EXPENSES 511 Insurance Expense 512 Utilities Expense 520 Cost of Goods Sold 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 559 Miscellaneous Expenses 910 Income Tax Expense
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.
- The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey.
- The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.
- The discount rate is 10%, which is implicit in the lease. Garvey knows this rate.
- The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000.
- The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line
depreciation is used for similar assets.
Required:
Prepare the
CHART OF ACCOUNTS
Richie Company
ASSETS | |
111 | Cash |
121 | |
122 | Lease Receivable |
141 | Inventory |
152 | Prepaid Insurance |
181 | Equipment Leased to Others |
LIABILITIES | |
211 | Accounts Payable |
231 | Salaries Payable |
250 | Unearned Interest |
261 | Income Taxes Payable |
EQUITY | |
311 | Common Stock |
331 |
REVENUE | |
411 | Sales Revenue |
422 | Interest Income |
EXPENSES | |
511 | Insurance Expense |
512 | Utilities Expense |
520 | Cost of Goods Sold |
521 | Salaries Expense |
532 | |
540 | Interest Expense |
559 | Miscellaneous Expenses |
910 | Income Tax Expense |
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