Amusement Company leased equipment from General Robotics Company, beginning on J

Question

Amusement Company leased equipment from General Robotics Company, beginning on January 1, 2017. The lease term is 5 years and requires equal rental payments of $60,493 at the beginning of each year of the lease (based on a 6% interest rate) starting on the commencement date (January 1, 2017). The equipment has a fair value at the commencement date of the lease of $300,000, a carrying value to General Robotics of $275,000, an estimated useful life of 5 years, and an estimated residual value of $40,000. The residual value is guaranteed by Smokey Finance. Therefore, this is a direct financing lease and the appropriate interest rate is 10.4%. Prepare General Robotics’ 2017 journal entries

Explanation / Answer

Interest Income = (342465-67465-60493 )*10.4% = 21,584

Date Account Description Debit Credit 1-Jan-17 Lease Receivable       342,465 Unearned interest Revenue          67,465 Leased Assets       275,000 (Being Lease Recorded) 1-Jan-17 Cash          60,493 Lease Receivable          60,493 (Being Lease Rental received) 31-Dec-17 Unearned interest Revenue          21,584 Interest revenue*          21,584 (Being Finance Income Recognised)

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