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Problem On January 1, 2018, Allied Industries leased a high-performance conveyer

ID: 2336479 • Letter: P

Question

Problem On January 1, 2018, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $956,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2022, will be $300,000. Negotiations led to the lessee guaranteeing a $340,000 residual value. Equal payments under the finance/sales-type lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Karrier is aware that Allied used a 5% interest rate when calculating lease payments Required 1. Prepare the appropriate entries for both Karrier and Allied on January 1,2018, to record the lease 2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2018, related to the lease.

Explanation / Answer

Allied (lessor) PV MLP

$200,000*3.546=$709,200

$340,000*0.8227=$279,719

Total PVMLP= $988,919

Conditions for Finance Lesse

Title Transfer: No

Bargain Purchase Option: yes

Lease Term >=75% of economic life = Yes

PVMLP>=FMV= Yes

It is a sales type lease

It is also finance lease from the point of veiw of Karrier

Journal Entries as on 01-01-2018 in books of Allied Industires

Lease Receivable Dr $11,40,000

Unearned Interest revenue $184,000

High peformance Conveyer $956,000

Journal Entry in the books of Karrier

Fixed Asset $11,40,000

To Lease :Liability 9.88.919

To Intterest payable 151,181

31st December Entries -Allied Industries

Un earned Intrest revenue $57,000

Interest Revenue $57,000

31st December 2018 Karrier

Lease Liability $142,200

Interest Expense $ 57,880

To Cash 2,00,000   

Depreciation Expense $285,000

To accumulated depreciation $285,000

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