Larkspur Leasing Company signs a lease agreement on January 1, 2017, to lease el
ID: 2562206 • Letter: L
Question
Larkspur Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Crane Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:
1. Crane has the option to purchase the equipment for $21,000 upon termination of the lease. It is not reasonably certain that Crane will exercise this option.
2. The equipment has a cost of $220,000 and fair value of $259,000 to Larkspur Leasing. The useful economic life is 2 years, with a residual value of $21,000.
3. Larkspur Leasing desires to earn a return of 5% on its investment.
4. Collectibility of the payments by Larkspur Leasing is probable.
Prepare the journal entries on the books of Larkspur Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.
Explanation / Answer
= 220000 - [ 21000 * 1 / (1.05)2 ]
= 220000 - [ 21000 * 1 / 1.1025 ]
= 220000 - [ 21000 * 0.907 ]
= 220000 - 19047= $ 200953
Annual lease payment = 267779 / [ { 1 - (1.05)-2 } / 0.05 ]
= 200953 / [ (1 - 0.907) / 0.05 ]
= 200953 / (0.093 / 0.05)
= 200953 / 1.86
= $ 108039
Journal entries
Year
General journal
Debit ($)
Debit ($)
Credit ($)
2017
Cash A/c Dr.
To Lease receivable A/c (108039 - 21000)
To Interest revenue A/c (108039 - 87039)
108039
87039
21000
2018
Cash A/c Dr.
To Lease receivable A/c (108039 - 3922)
To Interest revenue A/c (220000 - 108039 * 2)
108039
104117
3922
Note :- Leased asset will not be recognized at the fair value of $ 259000 in the books of accounts larkspurLeasing because the total present value of minimum lease payment $ 216078 (108039 * 2) is less than the fair value of lease asset amounting to $ 259000 given in the question.
Year
General journal
Debit ($)
Debit ($)
Credit ($)
2017
Cash A/c Dr.
To Lease receivable A/c (108039 - 21000)
To Interest revenue A/c (108039 - 87039)
108039
87039
21000
2018
Cash A/c Dr.
To Lease receivable A/c (108039 - 3922)
To Interest revenue A/c (220000 - 108039 * 2)
108039
104117
3922
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