Question

(Lessor Entries; Sales-Type Lease) Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of \(35,013 at the beginning of each year. The first payment is received on January 1, 2017. Crosley had purchased the machine during 2016 for \)160,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Crosley. Crosley set the annual rental to ensure an 11% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Crosley at the termination of the lease.

Instructions

1. Compute the amount of the lease receivable.

Short answer

Lease receivable is $200,001

Step-by-step solution

Meaning of Lease receivable

Any and all rents, payments, and other amounts (including, without limitation, any sales or use taxes, supplementary rent payments, additional rent payments, rental stores, engine stores, maintenance stores, and maintenance) under or in connection with the lease ) is known as a lease receivable.

Computing the amount of the lease receivable

$$\begin{gathered} \mathrm{Lease}\mathrm{receivable}=\mathrm{Annual}\mathrm{payments}\times \mathrm{present}\mathrm{value}\mathrm{ofannuity} \\ =\$35,013\times 5.7122 \\ =\$200,001 \end{gathered}$$

Note: Present value of an annuity due of 1 for 8 periods at 11%