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

(b) Prepare all necessary journal entries for Crosley for 2017.

Short answer

Interest revenue is $18,149

Step-by-step solution

Meaning of Sales type lease

A sales-type lease is a financing lease in which the underlying asset's fair market value(or, if lower, the PV of lease payments) is not equal to its cost, resulting in a selling profit or loss.

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
Jan.1, 2017	Lease Receivable	200,001
	Cost of Goods Sold	160,000
	Sales Revenue		200,001
	Inventory		160,000
Jan.1, 2017	Cash	35,013
	Lease Receivable		35,013
Dec. 31, 2017	Interest Receivable	18,149
	Interest Revenue		18,149

Working Notes:-

Calculation of Interest revenue

$$\begin{gathered} \mathrm{Interest}\mathrm{revenue}=\left(\mathrm{Lease}\mathrm{receivable}-\mathrm{Annual}\mathrm{payments}\right)\times \mathrm{rate}\mathrm{of}\mathrm{return} \\ =\left(\$200,001-\$35,013\right)\times \frac{11}{100} \\ =\$164,988\times \frac{11}{100} \\ =\$18,149 \end{gathered}$$