Question

Lessor Accounting with receipts at beginning of yearEdom Company, the lessor, enter into a lease with Davis

Company to lease equipment to Davis beginning January 1, 2013. the lease terms , provisions, and related events are as follows:

1. The lease term is 5 years. The lease is non cancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year.

2. The equipment costs $313,000. The equipment ahs an estimated life of 6 years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom.

3. Davis agrees to pay all executor costs.

 4. The interest rate implicit in  the lease is 14%.

 5. The initial cost are insignificant and assured to be zero.

 6. The collectability of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of un reimbursable costs yet to be incurred by the lessor.

 1. Determine if the lease is a sales-type or direct financing lease from Edom’s point of view.

 2. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor. Enter all amounts as positive numbers. If an amount is zero, enter “0”. If required, round your answers to the nearest cent and use the rounded answers in subsequent computations.

                                                                Edom Company

                                                   Lease Payments Received and Interest Revenue Earned Summary

                                                                        2013-2017                                              Lease                                      Unearned                            Net

                Annual Lease                            Interest Revenue                                       Receivable                              Interest                               Investment

                 Payments                                   at 14% on Net                                                                                            Leases

                  Received

Jan. 1, 2013

 Jan. 1, 2013

 Dec. 31, 2013

 Jan. 1, 2014

 Dec. 31, 2014

 Jan. 1, 2015                               Received                                    Investment

 Dec. 31, 2015

 Jan. 1, 2016

 Dec . 31,2016

 Jan. 1, 2017

 Dec. 31, 2017

 3. Prepare journal entries for Edom, The lessor, for the years 2013 and 2014. For compound entries, if an amount box does not require an entry, leave it blank. Round your answers to the nearest cent.

 Record Lease                      Lease Receivable

                                               Cost of Asset Leased

                                               Sales

                                               Equipment

                                               Unearned Interest:Leases

 Jan. 1

 Received Payment             Cash

                                               Lease Receivable

 Dec. 31

Interest Revenue                Unearned Interest:Leases

                                               Interest revenue: Leases

 2014

Jan.1                                       Cash

Receive Payment                  Lease Receivable

 Dec.31                                   Unearned Interest: Leases

 Interest Revenue                  Interest revenue: Leases             

 

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