Ivanhoe Company specializes in leasing large storage units to other businesses. Ivanhoe entered a contract to lease a storage unit to Cullumber, Inc. for 4 years when that particular storage unit had a remaining useful life of 5 years. The fair value of the unit was $32,000 at the commencement of the lease on January 1, 2025. The present value of the five equal rental payments of $8,250 at the start of each year, plus the present value of a guaranteed residual value of $1,000, equals the fair value of $32,000, Ivanhoe's implicit rate of return on the lease of 4%. The following is a correct, complete amortization schedule created by Ivanhoe Date 1/1/25 1/1/25 1/1/26 1/1/27 1/1/28 12/31/28 Lease Payment $8,250 8,250 8,250 8,250 1,000 $34,000 Interest (4%) on Outstanding Lease Receivable $950 658 354 38 $2,000 Reduction of Lease Receivable $8,250 7,300 7,592 7,896 962 $32,000 Balance of Lease Receivable $32,000 23,750 16,450 8,858 962 Given the above schedule, make the appropriate entries at December 31, 2028, to record the accrual of interest and the return of the storage unit to Ivanhoe (assuming the unit is returned on December 31, 2028, at the expected and guaranteed residual value of $1,000). (List all debit entries before credit entries. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.
Ivanhoe Company specializes in leasing large storage units to other businesses. Ivanhoe entered a contract to lease a storage unit to Cullumber, Inc. for 4 years when that particular storage unit had a remaining useful life of 5 years. The fair value of the unit was $32,000 at the commencement of the lease on January 1, 2025. The present value of the five equal rental payments of $8,250 at the start of each year, plus the present value of a guaranteed residual value of $1,000, equals the fair value of $32,000, Ivanhoe's implicit rate of return on the lease of 4%. The following is a correct, complete amortization schedule created by Ivanhoe Date 1/1/25 1/1/25 1/1/26 1/1/27 1/1/28 12/31/28 Lease Payment $8,250 8,250 8,250 8,250 1,000 $34,000 Interest (4%) on Outstanding Lease Receivable $950 658 354 38 $2,000 Reduction of Lease Receivable $8,250 7,300 7,592 7,896 962 $32,000 Balance of Lease Receivable $32,000 23,750 16,450 8,858 962 Given the above schedule, make the appropriate entries at December 31, 2028, to record the accrual of interest and the return of the storage unit to Ivanhoe (assuming the unit is returned on December 31, 2028, at the expected and guaranteed residual value of $1,000). (List all debit entries before credit entries. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Ivanhoe Company's Lease Amortization Schedule**
**Summary:**
Ivanhoe Company specializes in leasing large storage units to businesses. In this example, Ivanhoe leased a storage unit to Cullumber, Inc. for 4 years when the unit had a remaining useful life of 5 years. The fair value of the unit was $32,000 at the commencement of the lease on January 1, 2025. The present value of the five equal rental payments of $8,250 at the start of each year, plus the present value of a guaranteed residual value of $1,000, equals the fair value of $32,000, using Ivanhoe's implicit rate of return of 4%. Below is the correct, complete amortization schedule created by Ivanhoe.
**Amortization Schedule:**
| Date | Lease Payment | Interest (4%) on Outstanding Lease Receivable | Reduction of Lease Receivable | Balance of Lease Receivable |
|-----------|---------------|----------------------------------------------|------------------------------|-----------------------------|
| 1/1/25 | $8,250 | - | $8,250 | $32,000 |
| 1/1/26 | 8,250 | $950 | 7,300 | 16,450 |
| 1/1/27 | 8,250 | 658 | 7,592 | 8,858 |
| 1/1/28 | 8,250 | 354 | 7,896 | 962 |
| 12/31/28 | 1,000 | 38 | 962 | 0 |
| **Total** | **$34,000** | **$2,000** | **$32,000** | |
**Explanation:**
- Each lease payment is $8,250 except for the final payment which includes an additional residual value of $1,000.
- Interest is calculated at a rate of 4% on the outstanding lease receivable balance after each payment.
- The reduction of the lease receivable represents how much of the lease payment goes towards reducing the outstanding lease balance.
- The balance of lease receivable shows the remaining amount owed after each payment is made.
**Journal Entries as of December 31, 2028:**
**To record the accrual of
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