Assume that IBM leased equipment that was carried at a cost of $120,000 to Swand

Question

Assume that IBM leased equipment that was carried at a cost of $120,000 to Swander Company. The term of the lease is 6 years December 31, 2016, with equal rental payments of $30,044 beginning December 31, 2016. The fair value of the equipment at commencement of the lease is $150,001. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title. Collectibility of lease payments for IBM is probable.

Prepare IBM’s December 31, 2016, journal entries at commencement of the lease.

December 31, 2016:

December 31, 2016

Explanation / Answer

Date Account Name Debit Credit December 31, 2016 Lease receivable (4.99271 * $30,044) $150,001              Equipment $150,001 December 31, 2016 Cash $30,044             Lease Receivable $30,044 Note : Annuity present value factor for I = 8%, n= (1 + 5) years = (1 + 3.99271) =4.99271

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