Assume that IBM leased equipment that was carried at a cost of $182,000 to Sharo

Question

Assume that IBM leased equipment that was carried at a cost of $182,000 to Sharon Swander Company. The term of the lease is 7 years beginning January 1, 2017, with equal rental payments of $31,561 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 $182,000. The equipment has a useful life of 7 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.Prepare IBM’s January 1, 2017, journal entries at the inception of the lease.

Explanation / Answer

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Present value of Lease payments of 31561 31561*PVAF 7%, 7 Year Year PVF (1/(1.07)^Year) 31561*5.7665 0 1.0000 Present Value of annual lease payment 182000 1 0.9346 2 0.8734 Since PV of annual lease payment is equal to Fair value and life also equal to lease term, its capital lease. 3 0.8163 4 0.7629 Journal entry on Jan 1 2017 5 0.7130 6 0.6663 5.7665 Date Account Debit Credit 7 0.6227 Jan 1 2017 Lease Receivable 182000 Equipment 182000 (Booked lease receivable at inception) Jan 1 2017 Cash 31561 Lease Receivable 31561 (Received first lease amount on inception)

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