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 $150,000. 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. Assume the sales-type lease was recorded at a present value of $150,000.

Prepare IBM’s December 31, 2017, entry to record the lease transaction with Swander Company.

Explanation / Answer

1. Journal Entry

Journal Entry 1

Debit Cash $30044

Credit Interest Revenue $9596

Credit Lease Receivable $20448

2. Computation of Interest

Interest = (Lease Receivable - First Payment) * Rate

Interest = (150000 - 30044) * 8%

Interest = $9596

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