
Concept explainers
1.
Record the lease and the receipt of the second and third instalments of $2,000 in Company A’s books of accounts.
1.

Explanation of Solution
Lease: Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Sale type Lease: In a Sales-Type lease, the lessor sells the asset to the lessee and records a receivable. In this type of lease, the lessor records a dealer’s or manufacturer’s profit or loss depending upon the difference between the fair value of the asset and the carrying value of the asset.
Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and
stockholders’ equities . - Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Record the lease and the receipt of the second and third instalments of $2,000 in Company A’s books of accounts:
Summary Table | |||
Lessee Company | |||
Lease payment required | Interest at 1% 0n Unpaid Obligation | Balance of Lease Obligation | |
Lessor Company | |||
Date | Lease Rental Collected | Interest at 1% on Net Investment | Net Investment |
Beginning of 1st month | $60,817 | ||
Beginning of 1st month | $2,000 | $0 | $58,817 |
End of 1st month | 0 | $588 | $59,405 |
Beginning of 2nd month | $2,000 | 0 | $57,405 |
End of 2nd month | 0 | $574 | $57,979 |
Beginning of 3rd month | $2,000 | 0 | $55,979 |
End of 3rd month | 0 | $560 | $56,539 |
Table (1)
Notes:
Prepare the
Date | Accounts title and explanation | Post Ref. | Debit($) | Credit($) |
At inception | Lease Receivable | $72,000 | ||
Sales | $60,817 | |||
Unearned Interest: Leases | $11,183 | |||
(To record the sales-type lease at inception) | ||||
At inception | Cost of Asset Leased | $50,000 | ||
Speciality Equipment | $50,000 | |||
(To record the cost of the asset leased) | ||||
Initial receipt | Cash | $2,000 | ||
Lease Receivable | $2,000 | |||
(To record the receipt of lease payment) | ||||
At the end of 1st month | Unearned Interest: Leases | $588 | ||
Interest Revenue | $588 | |||
(To recognize the interest revenue of the year) | ||||
Second instalment | Cash | $2,000 | ||
Lease Receivable | $2,000 | |||
(To record the receipt of lease payment) | ||||
At the end of 2nd month | Unearned Interest: Leases | $574 | ||
Interest Revenue | $574 | |||
(To recognize the interest revenue of the year) | ||||
Third instalment | Cash | $2,000 | ||
Lease Receivable | $2,000 | |||
(To record the receipt of lease payment) | ||||
At the end of 3rd month | Unearned Interest: Leases | $560 | ||
Interest Revenue | $560 | |||
(To recognize the interest revenue of the year) |
Table (2)
2.
Record the lease and the payment of the second and third instalments of $2,000 in Company B’s books of accounts and monthly
2.

Explanation of Solution
Compute the present value of the lease payments:
Prepare the journal entries to record the lease and the receipt of the second and third instalments of $2,000 in Company B’s books of accounts:
Date | Accounts title and explanation | Post Ref. | Debit($) | Credit($) |
At Inception | Leased Equipment | $60,817 | ||
Capital Lease Obligation | $60,817 | |||
(To record thecapital lease at inception) | ||||
Initial payment | Capital Lease Obligation | $2,000 | ||
Cash | $2,000 | |||
(To record the capital lease payment) | ||||
At the end of 1st month | Depreciation Expense-Lease Equipment | $1,689 | ||
| $1,689 | |||
(To record the depreciation expense of the year) | ||||
At the end of 1st month | Interest Expense | $588 | ||
Accrued Interest on capital lease obligation | $588 | |||
(To record the interest expense of the lease ) | ||||
Second instalment | Capital Lease Obligation | $1,412 | ||
Accrued interest on capital lease obligation | $588 | |||
Cash | $2,000 | |||
(To record the capital lease payment) | ||||
At the end of 2nd month | Depreciation Expense-Lease Equipment | $1,689 | ||
Accumulated depreciation-Equipment | $1,689 | |||
(To record the depreciation expense of the year) | ||||
At the end of 2nd month | Interest Expense | $574 | ||
Accrued Interest on capital lease obligation | $574 | |||
(To record the interest expense of the lease ) | ||||
3rd instalment | Capital Lease Obligation | $1,426 | ||
Accrued interest on capital lease obligation | $574 | |||
Cash | $2,000 | |||
(To record the capital lease payment) | ||||
At the end of 3rd month | Depreciation Expense-Lease Equipment | $1,689 | ||
Accumulated depreciation-Equipment | $1,689 | |||
(To record the depreciation expense of the year) | ||||
At the end of 3rd month | Interest Expense | $560 | ||
Accrued Interest on capital lease obligation | $560 | |||
(To record the interest expense of the lease ) |
Table (3)
Want to see more full solutions like this?
Chapter 20 Solutions
Intermediate Accounting: Reporting and Analysis, 2017 Update
- Sharon Mars, a recent graduate of Bell's accounting program, evaluated the operating performance of Carla Vista Company's six divisions. Sharon made the following presentation to Carla Vista's board of directors and suggested the Percy Division be eliminated. "If the Percy Division is eliminated," she said, "our total profits would increase by $25,300." The Other Five Divisions Percy Division Total Sales $1,663,000 $100,900 $1,763,900 Cost of goods sold 978,400 76,500 1,054,900 Gross profit 684,600 24,400 709,000 Operating expenses 528,500 49,700 578,200 Net income $156,100 $(25,300 ) $130,800 In the Percy Division, cost of goods sold is $60,100 variable and $16,400 fixed, and operating expenses are $29,100 variable and $20,600 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Is Sharon right about eliminating the Percy Division? Prepare a schedule to support your answer. (Enter negative amounts using either a negative sign preceding…arrow_forwardhello tutor please help mearrow_forwardaccounting questionarrow_forward
- Mark purchased 200 shares of stock for $40 per share. During the year, he received $500 in dividends. He recently sold the stock for $55 per share. What was Mark's return on the stock? a) $3,500 b) $4,000 c) $3,900 d) $4,500arrow_forwardSummit Industries has a normal capacity of 30,000 direct labor hours. The company's variable costs are $42,000, and its fixed costs are $18,000 when running at normal capacity. What is the standard manufacturing overhead rate per unit? a) $1.50 b) $1.60 c) $2.00 d) $2.10arrow_forwardIvanhoe, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a smartphone. The cost structure to manufacture 20,400 Tri-Robos is as follows. Cost Direct materials ($51 per robot) $1,040,400 Direct labor ($39 per robot) 795,600 Variable overhead ($7 per robot) 142,800 Allocated fixed overhead ($29 per robot) 591,600 Total $2,570,400 Ivanhoe is approached by Tienh Inc., which offers to make Tri-Robo for $116 per unit or $2,366,400. Following are independent assumptions. Assume that none of the fixed overhead can be avoided. However, if the robots are purchased from Tienh Inc., Ivanhoe can use the released productive resources to generate additional income of $375,000. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Direct materials Direct labor Variable overhead Fixed overhead Opportunity cost Purchase price Totals Make…arrow_forward
- correct answer pleasearrow_forwardcost accountingarrow_forwardSummit Holdings has $280,000 in accounts receivable that will be collected within 70 days. The company needs cash urgently and decides to factor them, receiving $260,000. Skyline Factoring Company, which took the receivables, collected $275,000 after 85 days. Find the rate of return on this investment for Skyline.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
