Other information:
Lease term
4 years
Annual Payments
$90,000 on January 1 beginning with the current year.
Life of Asset
4 years
Fair value of Asset
$326,189
Implicit interest rate
7%
Incremental rate
7%
There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year.
Refer to Stillwater Sports:
Required:
1. What type of lease is this lease for Premier Leasing.
2. Prepare appropriate journal entries for Premier Leasing for the first year.
3. Show how the lease will be presented on Premier’s financial statements for the first year.
What will be an ideal response?
Answer:
1. This is a direct-financing lease for Premier Leasing, because there is no manufacturer’s profit involved.
2. Journal Entries
January 1
Lease Receivable
326,189
Equipment
326,189
Cash
90,000
Lease Receivable
90,000
December 31
Interest Receivable
16,533
Interest Revenue
16,533
$[(326,189 – 90,000) × 7%]
3.
Current Assets:
Interest Receivable $16,533
Lease Receivable 73,467
Long-Term Assets
Lease Receivable $162,722