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.)

(d) Prepare all the necessary journal entries for Bensen for 2017.

Step by step solution

01

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.

02

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
January 1, 2017	Lease Receivable	150,000
	Cost of Goods Sold	114,654
	Sales Revenue		144,654
	Inventory		120,000
January 1, 2017	Cash	30,804
	Lease Receivable		30,804

$$\begin{gathered} \text{CalculationofLeasereceivableamount} \\ \text{Presentvalueofequipment=Annualrentalpayment×presentvalueofanannuty} \\ \text{=}\left(\$30,408\times 4.6989\right) \\ =\$144,653 \\ Ungurenteedresidalvalue=Ungurenteedresidal\times Presentvalue \\ =\left(\$10,000\times 0.5364\right) \\ =5,347 \\ Leastreceivable=Presentvalueofequipment+Unguarenteedresidualvalue \\ =\$144653+\$5,347 \\ =\$150,000 \\ Salesrevenue=inventory-\left(Ungurenteedresidal\times Presentvalue\right) \\ =\$120,000-\left(\$10,000\times 0.53464\right) \\ =\$120,000-\$5,347 \\ =\$150,000 \end{gathered}$$

Note: The values are rounded-off

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