Terms of a lease agreement and related facts were as follows: The lease asset had a retail cash selling price of $138,000. Its useful life was six years with no residual value (straight-line depreciation). Annual lease payments at the beginning of each year were $28,805, beginning January 1. Lessor’s implicit rate when calculating annual rental payments was 10%. Costs of $2,845 for legal fees for the lease execution were the responsibility of the lessor. Required: Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions:   1. The lease term is three years and the lessor paid $138,000 to acquire the asset (operating lease). 2. The lease term is six years and the lessor paid $138,000 to acquire the asset (sales-type lease). Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 9%. 3. The lease term is six years and the lessor paid $104,000 to acquire the asset (sales-type lease).

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Terms of a lease agreement and related facts were as follows:

  1. The lease asset had a retail cash selling price of $138,000. Its useful life was six years with no residual value (straight-line depreciation).
  2. Annual lease payments at the beginning of each year were $28,805, beginning January 1.
  3. Lessor’s implicit rate when calculating annual rental payments was 10%.
  4. Costs of $2,845 for legal fees for the lease execution were the responsibility of the lessor.

Required:
Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions:
 

1. The lease term is three years and the lessor paid $138,000 to acquire the asset (operating lease).
2. The lease term is six years and the lessor paid $138,000 to acquire the asset (sales-type lease). Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 9%.
3. The lease term is six years and the lessor paid $104,000 to acquire the asset (sales-type lease).

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