Chapter 20, Problem 9E

Determining Type of Lease and Subsequent Accounting Ravis Rent-A-Car Company leases a car to Ira Reem, an employee, on January 1, 2016. The term of the noncancelable lease is 4 years. The following information about the lease is provided:

1. 1. Title to the car passes to Ira on the termination of the lease with no additional payment required by the lessee.
2. 2. The cost and fair value of the car to Ravis Rent-A-Car is $8,400. The car has an economic life of 5 years.
3. 3. The lease payments are determined at an amount that will yield Ravis Rent-A-Car a rate of return of 10% on its net investment.
4. 4. Collectibility of the lease payments is reasonably assured.
5. 5. There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
6. 6. Equal annual lease payments are due at the end of each year.

Required:

1. 1. Next Level Determine if the lease is an operating, sales-type, or direct financing lease from Ravis Rent-A-Car’s point of view. Why?
2. 2. Prepare a table summarizing the lease receipts and interest revenue earned by the Ravis Rent-A-Car for the 4-year lease term.
3. 3. Prepare the journal entries for 2016 and 2017 to record the lease agreement, the lease receipts, and the recognition of income on the books of Ravis Rent-A-Car.