Chapter 20, Problem 6P

Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a 5-year, noncancelable, sales-type lease on January 1, 2019, for equipment that cost Lessor $375,000 (useful life is 5 years). The fair value of the equipment is $400,000. Lessor expects a 12% return on the cost of the asset over the 5-year period of the lease. The equipment will have an estimated unguaranteed residual value of $20,000 at the end of the fifth year of the lease. The lease provisions require 5 equal annual amounts, payable each January 1, beginning with January 1, 2019. Lessee pays all executory costs directly to a third party. The equipment reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, and the lessor expects to be able to collect all lease payments.

Required:

1. 1. Show how Lessor should compute the annual rental amounts.
2. 2. Prepare a table summarizing the lease and interest receipts that would be suitable for Lessor.
3. 3. Prepare a table showing the accretion of the unguaranteed residual asset.
4. 4. Prepare the journal entries for Lessor for the years 2019, 2020, and 2021.