Jayhawk Company leased a machine from Houston Leasing. The machine had a 5 year

Question

Jayhawk Company leased a machine from Houston Leasing. The machine had a 5 year life. The lease was for three years and required three payments of $200,000 each made at the beginning of the year starting with January 1, 2017. The lease was non-cancellable, and title did not pass at the end of the lease. There was no bargain purchase right either. However, the present value of the minimum lease payments was greater than 90% of the fair value on January 1, 2017. The cost of the leased equipment to Houston was $450,000. Houston’s earning’s rate is 8%, and there is a guaranteed residual value of $20,000 at the end of year 3. The actual value at the end of year 3 was $15,000. Houston considers this lease a sale type lease.

On the books of Houston,

Prepare an amortization schedule of the lease receivable.

Record the inception of the lease on January 1, 2017 and the receipt of the first payment.

Record the last receipt from the lease and the return of the equipment.

Assume the lease was cancellable. Record the receipt of the second payment on January 1, 2018.

Explanation / Answer

Houstan Company Lease Amortization Schedule a. Computation of Net Investment Date Lease Payment Received Interest Revenue at 8% on Net Investment Lease Receivable Unearned Interest Leases net Investment Annual Rental $200,000 01/01/2017 $620,000 $47,470 $572,530 Cumm PVF @8% for 3 Year 2.783265 01/01/2017 $200,000 $420,000 $47,470 $372,530 Present Value of Lease rental (a) $556,653.00 01/01/2018 $200,000 $29,802.40 $220,000 $17,668 $202,332 Present Value of Gurrented Residual Value ($20000*0.793832) (b) $15,877.00 01/01/2019 $200,000 $16,186.59 $20,000 $1,481 $18,519 Net Investment/ Present value of Lease (a+b) $572,530.00 01/01/2019 $20,000 $1,481.52 $0 -$1 $1 Gross Lease Receivable/ Gross Investment ( $200000*3+20000) $620,000 Journal Entry in the books of Houston Company Date Account & Explanation Debit Credit 01/01/2017 Lease Receivable $620,000.00 Cost of Goods Sold $450,000.00 Sales $572,530.00 Unearned interest on Lease $47,470.00 Equipment -ASS $450,000.00 To Record Sale , Lease Receivable and Uneraned Interest 01/01/2017 Cash $200,000.00 Lease Receivable $200,000.00 To record Lease Payment Recevied 31/12/2017 Unearned Interest on Lease $29,802.40 Interest Revenue $28,300.00 To Record First Lease Interets Revenue 01/01/2018 Cash $200,000.00 Lease Receivable $200,000.00 To record Lease Payment Recevied 01/01/2019 Cash $200,000.00 Lease Receivable $200,000.00 To record Lease Payment Recevied 01/01/2019 Unearned Interest on Lease $1,481.52 Interest Revenue $1,481.52 01/01/2019 Cash $20,000.00 Lease Receivable $20,000.00 To Record received of Gurrentee Residual payment

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