On January 1, 2016, Ballieu Company leases specialty equipment with an economic

Question

On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions: • The lease is noncancelable and has a term of 8 years. • The annual rentals are $40,500, payable at the beginning of each year. • The interest rate implicit in the lease is 13%. • Anderson agrees to pay all executory costs and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2024. • The cost of the equipment to the lessor is $155,500, and the fair retail value is approximately $219,600. • The lessor incurs no material initial direct costs. • The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. • The lessor estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term. The lessor calculates that the present value on January 1, 2016 of 8 annual payments in advance of $40,500 discounted at 13% is $219,615.71 (the $1 purchase option is ignored as immaterial). Required: 1. Next Level Identify the classification of the lease transaction from Ballieu’s point of view. 2. Prepare all the journal entries for Ballieu for the years 2016 and 2017.

Explanation / Answer

It will be classified as Sale type Finance lease Transaction:- a. The lease term is for the major part of the economic life of the unbderlying asse, even if tittle is not transferred and in given cases lease term is 8year and economic life of Asset is also 8 year b. The Net Investment value is differ from carrying Value. Ballieu Company Lease Amortization Schedule Date Annual Lease Payment Received Interest Revenue at 13% on Net Investment Lease Receivable Unearned Interest Leases net Investment Journal Entry in the books of Ballieu Company 01/01/2016 $324,000.00 $104,384.29 $219,615.71 Date Account & Explanation Debit Credit 01/01/2016 $40,500.00 $283,500.00 $104,384.29 $179,115.71 01/01/2016 Lease Receivable $324,000.00 31/12/2016 $40,500.00 $23,285.04 $243,000.00 $81,099.25 $161,900.75 Cost of Goods Sold   $155,500.00 31/12/2017 $40,500.00 $21,047.10 $202,500.00 $60,052.15 $142,447.85 Sales $219,615.71 31/12/2018 $40,500.00 $18,518.22 $162,000.00 $41,533.93 $120,466.07 Unearned interest on Lease $104,384.29 31/12/2019 $40,500.00 $15,660.59 $121,500.00 $25,873.34 $95,626.66 Equipment $155,500.00 31/12/2020 $40,500.00 $12,431.47 $81,000.00 $13,441.87 $67,558.13 To Record Equipment taken on Lease 31/12/2021 $40,500.00 $8,782.56 $40,500.00 $4,659.32 $35,840.68 31/12/2022 $40,500.00 $4,659.29 $0.00 $0.03 -$0.03 01/01/2016 Cash $40,500.00 Lease Receivable $40,500.00 To record Annual Lease Rent received 31/12/2016 Unearned interest on Lease $23,285.04 Interest revenue $23,285.04 To Recored interest Income 01/01/2017 Cash $40,500.00 Lease Receivable $40,500.00 To record Annual Lease Rent received 31/12/2017 Unearned interest on Lease $21,047.10 Interest revenue $21,047.10 To Recored interest Income

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