Lessor Accounting with Receipts at End of Year
Response to the following problem:
The Berne Company, the lessor, enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2010. The lease terms, provisions, and related events are as follows:
1. The lease term is four years. The lease is noncancelable and requires annual rental payments of $50,000 to be made at the end of each year.
2. The cost of the equipment is $130,000. The equipment has an estimated life of four years and an estimated residual value at the end of the lease term of zero.
3. Fox agrees to pay all executory costs.
4. The interest rate implicit in the lease is 12%.
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 Berne'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 Berne Company, the lessor, for the years 2010 and 2011.