Assume that IBM leased equipment that was carried at a cost of $174,000 to Sharo

Question

Assume that IBM leased equipment that was carried at a cost of $174,000 to Sharon Swander Company. The term of the lease is 5 years beginning January 1, 2017, with equal rental payments of $39,661 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 $174,000. The equipment has a useful life of 5 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 $174,000.

Prepare IBM’s December 31, 2017, entry to record interest.

Explanation / Answer

Answer:

Lease Balance as at 31.12.2017 = 174000 - 39661 = 134339

Interest expense = 134339 x 7% = 9403.73

31.12.2017 Interest Receivable a/c            Dr. 9403.73

                          To Interest revenue                           9403.73

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