Bing Leasing, Inc. agrees to lease equipment to Boyd, Inc. on January 1, 2012. They agree on the following terms:
1) The normal selling price of the equipment is $1,500,000 and the cost of the asset to Bing Leasing, Inc. was $135,000.
2) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).
3) The lease begins on January 1, 2012 and payments will be in equal annual installments.
4) At the end of the lease, the equipment will revert to Bing Leasing, Inc. and have an unguaranteed residual value of $150,000. Their implicit interest rate is 10%.
5) Boyd will pay all maintenance, insurance, and tax costs directly and annual payments of $160,000 on January 1 of each year.
6) Bing Leasing, Inc. incurred costs of $10,600 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable.
Required:
a) Determine what type of lease this would be for the lessor and calculate the following (show all work).
Lease Receivable
Sales Price
Cost of Sales
b) Prepare Bing's amortization schedule for the lease terms.
c) Prepare all the journal entries for Kingdom for 2012. Assume a calendar year fiscal year.