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

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.

  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.
  2. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.
  3. The discount rate is 10%, which is implicit in the lease. Garvey knows this rate.
  4. 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.
  5. 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

 

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