Lessor Accounting Issues
Response to the following problem:
Ramallah Company leases heavy equipment to Terrell, Inc., on January 2, 2010 on the following terms:
1. Forty-eight lease rentals of $1,600 at the end of each month are to be paid by Terrell, Inc., and the lease is noncancelable.
2. The cost of the heavy equipment to Ramallah Company was $60,758.
3. Ramallah Company will account for this lease using the direct financing method. The difference between total rental receipts ($1,600 X 48 = $76,800) and the cost of the equipment ($60,758) was computed to yield a return of 1% per month over the lease term.
Required:
Prepare journal entries for Ramallah Company (the lessor) to record the lease contract and the receipt of the first lease rental on January 31, 2010. Record the part of the $16,042 Unearned Interest that was earned during the first month and carry calculations to the nearest dollar.