Lessor Accounting with Receipts at Beginning of Year
Response to the following problem:
The Edom Company, the lessor, enters into a lease with Jebusite Company to lease equipment to Jebusite beginning January 1, 2010. The lease terms, provisions, and related events are as follows:
1. The lease term is five years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year.
2. The cost of the equipment is $313,000. The equipment has an estimated life of six years and, at the end of the lease term, has an unguaranteed residual value of $20,000 accruing to the benefit of Edom.
3. Jebusite agrees to pay all executory costs.
4. The interest rate implicit in the lease is 14%.
5. The initial direct costs are insignificant and assumed to be zero.
6. 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 sales-type lease from Edom's point of view, calculate the selling price and assume that this is also the fair value.
2. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.
3. Prepare journal entries for Edom Company, the lessor, for the years 2010 and 2011.