Lessor Accounting Issues
Response to the following problem:
The Rexon Company leases equipment to Ten-Care Company beginning January 1, 2010. The lease terms, provisions, and related events are as follows:
1. The lease term is eight years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.
2. The cost, and also fair value, of the equipment is $500,000. The equipment has an estimated life of eight years and has a zero estimated value at the end of that time.
3. Ten-Care Company agrees to pay all executory costs.
4. The lease contains no renewal or bargain purchase option.
5. The interest rate implicit in the lease is 14%.
6. The initial direct costs are insignificant and assumed to be zero.
7. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
Required:
1. Assuming that the lease is a direct financing lease from Rexon's point of view, calculate the amount of the equal rental receipts.
2. Prepare a table summarizing the lease receipts and interest revenue earned by Rexon.
3. Prepare journal entries for Rexon for the years 2010 and 2011.