A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.

Inception date	May 1, 2017
Annual lease payment due at the beginning of each year, beginning with May 1, 2017	\(21,227.65
Bargain-purchase option price at end of lease term	\) 4,000.00
Lease term	5 years
Economic life of leased equipment	10 years
Lessor’s cost	\(65,000.00
Fair value of asset at May 1, 2017	\)91,000.00
Lessor’s implicit rate	10%
Lessee’s incremental borrowing rate	10%

Instructions

(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.

(c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2017, 2018, and 2019. The lessor’s accounting period ends on December 31. Reversing entries are not used by Mooney.

Step by step solution

01

Meaning of Lease

In exchange for one or more payments, a lessor agrees to allow a lessee to have authority over the use of specific property, plant, and equipment for a specified length of time. Depending on whether an entity is a lessee or the lessor, there are different sorts of lease designations.

02

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
5/01/2017	Lease Receivable	91,000.00
	Cost of Goods Sold	65,000.00
	Sales Revenue		91,000.00
	Inventory		65,000.00
5/01/2017	Cash	21,227.65
	Lease Receivable		21,227.65
12/31/17	Interest Receivable	4,651.49
	Interest Revenue		4,651.49

Working Notes:

Computation of Interest Revenue

$\begin{array}{rcl}\mathrm{Interest}\mathrm{revenue}& =& \mathrm{Interest}\mathrm{on}\mathrm{lease}\mathrm{receivable}\times \mathrm{Total}\mathrm{months}\\ & =& \$6,977.24\times \frac{8}{12}\\ & =& \$4,651.49\end{array}$

Date	Particular	Debit ($)	Credit ($)
5/01/2018	Cash	21,227.65
	Lease Receivable		14,250.41
	Interest Receivable		4,651.49
	Interest Revenue ($6,977.24 - $4,651.49)		2,325.75
12/31/18	Interest Receivable	3,701.46
	Interest Revenue		3,701.46
5/1/2019	Cash	21,227.65
	Lease Receivable		15,675.46
	Interest Receivable		3,701.46
	Interest Revenue ($5,552.19 - $3,701.46)		1,850.73
12/31/2019	Interest Receivable	2,656.43
	Interest Revenue		2,656.43

Working Notes:

Computation of Interest revenue on 12-31-2018

$\begin{array}{rcl}\mathrm{Interest}\mathrm{revenue}& =& \mathrm{Interest}\mathrm{on}\mathrm{lease}\mathrm{receivable}\times \mathrm{Total}\mathrm{months}\\ & =& \$5,552\times .19\times \frac{8}{12}\\ & =& \$3,701.46\end{array}$

Computation of Interest Receivable on 12-31-2019

$\begin{array}{rcl}\mathrm{Interest}\mathrm{revenue}& =& \mathrm{Interest}\mathrm{on}\mathrm{lease}\mathrm{receivable}\times \mathrm{Total}\mathrm{months}\\ & =& \$3,984.64\times \frac{8}{12}\\ & =& \$2,656.43\end{array}$

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