Chapter 15, Problem 15.16P

Lessor’s initial direct costs; operating and sales-type leases

• LO15–2, LO15–3, LO15–4, LO15–7

Terms of a lease agreement and related facts were:

a. The lease asset had a retail cash selling price of $100,000. Its useful life was six years with no residual value (straight-line depreciation).

b. Annual lease payments at the beginning of each year were $20,873, beginning January 1.

c. Lessor’s implicit rate when calculating annual rental payments was 10%.

d. Costs of $2,062 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 $100,000 to acquire the asset (operating lease).

2. The lease term is six years and the lessor paid $100,000 to acquire the asset. 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 $85,000 to acquire the asset.