Question

Assume that IBM leased equipment that was carried at a cost of \(150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2017, with equal rental payments of \)30,044 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 $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, 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.

Short answer

Lease receivable is $150,000

Step-by-step solution

Meaning of Lease Receivable

A direct-financing lease's present value is equal to the sum of the minimum lease payments plus the unguaranteed residual value. Lessors must substitute a lease receivable for the leased asset under direct-financing leases. Any and all rents, payments, and other amounts under or in connection are known as a lease receivable.

Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
	Lease Receivable	150,000
	Equipment		150,000
	Cash	30,044
	Lease Receivable		30,044

Working Notes:

Calculation of Lease Receivable

$$\begin{gathered} \mathrm{Lease}\mathrm{Receivable}=\mathrm{rental}\mathrm{payments}\times \mathrm{present}\mathrm{value}\mathrm{of}\mathrm{annuity} \\ =\$30,044\times 4.99271 \\ =\$150,000 \end{gathered}$$

Note: Present value of an annuity due of 1 for 3 periods at 8%