(Lessor Entries; Direct-Financing Lease with Option to Purchase) Krauss Leasing

Question

(Lessor Entries; Direct-Financing Lease with Option to Purchase)

Krauss Leasing Company signs a lease agreement on January 1, 2011, to lease electronic equipment to Stewart Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

Instructions

(a) Prepare the journal entries on the books of Krauss Leasing to reflect the payments received under the lease and to recognize income for the years 2011 and 2012. (Round your answer to the nearest cent eg 8,751.25 For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2.)

(b) Assuming that Stewart Company exercises its option to purchase the equipment on December 31, 2012, prepare the journal entry to reflect the sale on Krauss's books.

Please help

Thank you

Explanation / Answer

Computation of two annual payments Cost 240,000 less: Present value of salvage value $16,000*.82645=13,223.20 (Present value of 1 at 10% for 2 periods) Total 226,776.80 $226,776.80/1.73554(the present value of an ordinary annuity of 1 for 2 periods at10%) = 130,666.42 Lease amount schedule Annual payment less executory cost Interest Recovery of l/r Lease rec 01/01/11 240000 12/31/11 130,666.42 24,0000 106,666.42 133,333.58 12/31/11 130,666.42 13,333.36 117,333.06 16,000.52 37,333.36 a. 1/01/11 Lease Receiv 240,000 debit Equipment 240,000 credit 12/31/11 Cash(130,666.42 +7000) 137,666.42 debit Executory costs Payab 7000 credit Lease Receiv 106,000.42 credit Interest Receiv 24,000 12/31/12 Cash 137,666.42 debit Exec cost Payab 7,000 credit Lease Receiv. 117,333.06 credit Interest Revenue 13,333.36 credit b. 12/31/12 Cash 16,000.52 debit Lease Receiv. 16,000.52 credit

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