Question

Question: (Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2017, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease.

1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2017.
3. The fair value of the equipment on January 1, 2017, is \(150,000, and its cost is \)120,000.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Flynn depreciates all of its equipment on a straight-line basis.
5. Bensen set the annual rental to ensure an 11% rate of return. Flynn’s incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

Instructions

(Both the lessor and the lessee’s accounting period ends on December 31.)

(c) Prepare all the necessary journal entries for Flynn for 2017.

Short answer

Answer

Lease Liability is $141,846

Accumulated depreciation is $23,641

Interest Payable is $13,325

Step-by-step solution

Meaning of Lessor

The lessor is the owner of the asset who gives the lessee the right to use the property on lease. The lessee makes payments in accordance with the agreement made between the lessor and the lessee.

Preparing Journal Entries for Flynn

Date	Particular	Debit ($)	Credit ($)
January 1, 2017	Leased Equipment	141,846
	Lease Liability		141,846
January 1, 2017	Lease Liability	30,804
	Cash		30,804

Working Notes:

Calculation of Lease Liability

$$\begin{gathered} \text{Leastliability=Annualrentalpayments×presentvalueofannuity} \\ =\$30,804\times 4.60478 \\ =\$141,846 \end{gathered}$$

Note: - Present value of an annuity due at 12% for 6 periods