Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharo

Question

Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2011, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception 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 is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM's January 1, 2011, journal entries at the inception of the lease.

Explanation / Answer

IBM's journal entries at the inception of the lease: Date Particulars L/F $ Dr $ Cr 1/1/2011 Lease receivabe 150,000                Equipment 150,000 1/1/2011 Cash 30,044              Lease receivable 30,044 31/12/2011 Interest receivable 9,596             Interest revenue-Leases 9,596 Date Particulars L/F $ Dr $ Cr 1/1/2011 Lease receivabe 150,000                Equipment 150,000 1/1/2011 Cash 30,044              Lease receivable 30,044 31/12/2011 Interest receivable 9,596             Interest revenue-Leases 9,596
On jan 1st 2011 the jounrnal entry will be as follows:                      Lease receivable                            150,000                                 Equipment                                           150,000               Here the total lease payment from the lessee during the future 6 years from 1/1/2011.                                    Cash                                              30,044                                Lease receivable                                    30,044                30,044 is the annual lease receivable from the lessee at the begining of the period.                        Interest receivable                            9,596                                  Interest revenue                                 9,596                 Here the 9,596 is the interest on the lease receivable which is calculated as follows:                        150,000 - 30,044 = 119,956 ( lease receivable at the end of period )                                                    = 119,956 x 8% ( interest rate )               Interest receivable         = $ 9,596.                      Lease receivable                            150,000                                 Equipment                                           150,000               Here the total lease payment from the lessee during the future 6 years from 1/1/2011.                                    Cash                                              30,044                                Lease receivable                                    30,044                30,044 is the annual lease receivable from the lessee at the begining of the period.                        Interest receivable                            9,596                                  Interest revenue                                 9,596                 Here the 9,596 is the interest on the lease receivable which is calculated as follows:                        150,000 - 30,044 = 119,956 ( lease receivable at the end of period )                                                    = 119,956 x 8% ( interest rate )               Interest receivable         = $ 9,596. Date Particulars L/F $ Dr $ Cr 1/1/2011 Lease receivabe 150,000                Equipment 150,000 1/1/2011 Cash 30,044              Lease receivable 30,044 31/12/2011 Interest receivable 9,596             Interest revenue-Leases 9,596

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