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. GENERAL JOURNAL DATE ACCOUNT TITLE DEBIT CREDIT 1 Jan 1 Cost of Goods Sold 200,000 2 Equipment leased to others 200,000 3 Sales Revenue ? 4 Lease Receivable ? 5 Dec 31 Cash 65,949.37 6 Lease Receivable 40,949.37 7 Interest Income 25,000.00 I need to know what the debit and credit amount is for the 2nd transaction.

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.

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.

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	DEBIT	CREDIT
1	Jan 1	Cost of Goods Sold	200,000
2		Equipment leased to others		200,000
3		Sales Revenue	?
4		Lease Receivable		?
5	Dec 31	Cash	65,949.37
6		Lease Receivable		40,949.37
7		Interest Income		25,000.00

I need to know what the debit and credit amount is for the 2nd transaction.

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