Lai
Corporation, which uses private enterprise GAAP, leased equipment that was
carried at a cost of $175,000 to Swander Inc., the lessee. The term of the
lease is five years, beginning January 1, 2011, with equal rental payments of
$40,584 at the beginning of each year. Swander pays all executory costs
directly to third parties. The equipment’s fair value at the lease’s inception
is $175,000. The equipment has a useful life of six years with no residual
value.
The
lease has an implicit interest rate of 8%, no bargain purchase option, and no
transfer of title. Collectibility is reasonably assured, with no additional
costs to be incurred by Lai. Prepare Lai Corporation’s January 1, 2011 journal
entries at the inception of the lease.
Lease Payments Receivable............... 202,920
Equipment
Purchased for Lease....... 175,000
Unearned
Interest Income—Leases..... 27,920
Lease
payments receivable $202,920
[ (5 X $40,584)
PV of
rentals (4.31213 X $40,584) 175,000
Unearned
interest $ 27,920
Cash.................................... 40,584
Lease
Payments Receivable........... 40,584
