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

Section: Chapter Questions

Problem 1Q

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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

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