On July 1, 20X2, Crosby Company sold equipment costing $200,000 to Bing for its
ID: 2470843 • Letter: O
Question
On July 1, 20X2, Crosby Company sold equipment costing $200,000 to Bing for its fair market value of $250,000 and immediately leased it back for 10 years. The estimated economic life of the equipment is 30 years. The lease payments are $39,506, providing a 12% return. The lease contract does not provide for a transfer of title nor a bargain purchase option. Assume straight line depreciation with zero salvage value and that the lease payments begin immediately. REQUIRED: Prepare the required journal entries, in proper general journal form, to record the effects of the above information on the books of both the lessor and the lessee.Explanation / Answer
In the books of lessee:
1St year:
Date
Account title & explanation
Debit
Credit
Equipment
$ 250,000
Lease obligation
$ 250,000
1st Year ending:
Date
Account title & explanation
Debit
Credit
Depreciation expenses ($250,000 /10)
$ 25,000
Accumulated depreciation
$ 25,000
Date
Account title & explanation
Debit
Credit
Interest expenses ($250,000*8%)
$ 20,000
Lease obligation
$ 19,506
Cash
$ 39,506
Year ending entries are comes into 2nd year onwards are same.
In the books of Lessor:
1st Year beginning:
Date
Account title & explanation
Debit
Credit
Net investment lease
$ 250,000
Sales
$ 250,000
Date
Account title & explanation
Debit
Credit
Cost of goods sold
$ 200,000
Inventory
$ 200,000
1st Year end:
Date
Account title & explanation
Debit
Credit
Cash
$ 39,506
Interest revenue
$ 20,000
Net investment in lease
$ 19,506
2nd year onwards year ending entries are same remaining years.
Date
Account title & explanation
Debit
Credit
Equipment
$ 250,000
Lease obligation
$ 250,000
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