Assume that IBM leased equipment that was carried at a cost of $145,000 to Sharo

Question

Assume that IBM leased equipment that was carried at a cost of $145,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of $28,430 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 $145,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 7%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Assume the direct-financing lease was recorded at a present value of $145,000.

Prepare IBM’s December 31, 2017, entry to record interest. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 125.)

Date

Account Titles and Explanation

Debit

Credit

December 31, 2017

Date

Account Titles and Explanation

Debit

Credit

December 31, 2017

Explanation / Answer

Date Accounts Titles and Explaination Debit Credit Dec. 31, 2017 Interest expense a/c [$145,000 x 7%] $10,150 Lease advance a/c $10,150 [Being interest paid for lease on Jan 1, 2017 recognised]

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