Amusement Company leased equipment from General Robotics Company, beginning on J

Question

Amusement Company leased equipment from General Robotics Company, beginning on January 1, 2017. The lease term is 5 years and requires equal rental payments of $60,493 at the beginning of each year of the lease (based on a 6% interest rate) starting on the commencement date (January 1, 2017). The equipment has a fair value at the commencement date of the lease of $300,000, a carrying value to General Robotics of $275,000, an estimated useful life of 5 years, and an estimated residual value of $40,000. The residual value is guaranteed by Smokey Finance. Therefore, this is a direct financing lease and the appropriate interest rate is 10.4%. Prepare General Robotics’ 2017 journal entries. Must use factor table.

Explanation / Answer

Given is a finance lease, because the life of lease is 5years and economic life of the asset is also 5 years.

Net investment in Lease = Gross Investment - Unearned finance income

Gross Investment = Minimum Lease payment + Guaranteed residual value + Unguaranteed residual value

= 302,465 + 40,000

= 342,465

Yr payment Discount factor Present Value

0   60,493 1 60,493

1 60,493 0.905 54,746

2   60,493 0.819 49,544

3 60,493 0.741 44,825

4 100,493 0.671 67,431

342,465 277,039

Unearned Finance Income = Gross Investment - PV of Gross Investment

= 342,465 - 277,039

= 65,426

LEASE AMORTISATION SCHEDULE

Yr Opening Balance Interest Expense Payment Principal Payment Closing Balance

0 277,039 - 60,493 60,493 216,546

1 $216,546 $22,737 $60,493 $37,756 178,790   

2 $178,790 $18,773 $60,493 $41,720 137,070   

3 $137,070 $14,392 $60,493 $46,101 90,969

4 $90,969 $9,524 $100,493 $90,969 0

JOURNAL ENTRIES :

January 1,2017

DR LEASE RECEIVABLE $277,039

CR MACHINERY $277,039

DR CASH $60,493

CR LEASE RECIEVABLE $60,493

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