Question

(Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value) George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $278,072,anditsunguaranteedresidualvalueattheendoftheleasetermisestimatedtobe$20,000. National will pay annual payments of $40,000atthebeginningofeachyearandallmaintenance,insurance,andtaxes.Georgeincurredcostsof$180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(c) Prepare all of the lessor’s journal entries for the first year.

Short answer

The total debit and credit side of the journal is $ 518,168.

Step-by-step solution

Meaning of Sale-type lease

In a sales-type lease, the lessor is assumed to be selling a product to the lessee, which necessitates the reporting of a profit or loss on the sale. As a result, at the lease's start date, the following accounting is applied: (a) Recognize assets. (b)Recognize net investment.

Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
Beginning of the Year	Lease Receivable	278,072
	Cost of Goods Sold	172,289
	Sales Revenue		270,361
	Inventory		180,000
	(To record the sale and the cost of goods sold in the lease transaction)
	Selling Expenses	4,000
	Cash		4,000
	(To record payment of the initial direct costs relating to the lease)
	Cash	40,000
	Lease Receivable		40,000
	(To record receipt of the first lease payment)
End of the Year	Interest Receivable	23,807
	Interest Revenue		23,807
	(To record interest earned during the first year of the lease)