Chapter 15, Problem 15.13P

Lessee and lessor; lessee guaranteed residual value

• LO15–2, LO15–6

On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $956,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2022, will be $300,000. Negotiations led to the lessee guaranteeing a $340,000 residual value.

Equal payments under the finance/sales-type lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 5% interest rate when calculating lease payments.

Required:

1. 1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2018, to record the lease.
2. 2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2018, related to the lease.