Question

Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2017. The lease agreement called for annual rental payments of $4,892 at the beginning of each year of the 4- year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000, and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Rauch set the lease payments with the intent of earning a 5% return, and Donahue is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) V Your answer is correct. What is the amount of the rental payments used in the lease agreement? (Round answer to 0 decimal places, e.g. 5,275.) Rental payments 4892 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Please prepare the entries for Rauch for 2017.

Answer 1

Computation of Net investment in the lease.

Year	Minimum lease payment($)	Unguranteed Residual Value($)	Gross Investment($)	PVF @ 5%	Net Investment($)
1.	4,892		4,892	1	4,892
2.	4,892		4,892	0.95238	4,659
3.	4,892		4,892	0.90703	4,437
4.	4,892		4,892	0.86384	4,226
4.		8,250	8,250	0.82270	6,786
			27,818		25,000

Journal Entry in the books of Rauch Incorporated for 2017

Date	Account title	debit($)	Credit($)
January 1, 2017	Lease receivable	25,000
	To Equipment		25,000
	(Being equipment given on lease)
January 1, 2017	Cash	4,892
	To Lease receivable		4,892
	(Being lease rent received)
December 31, 2017	Lease receivable[(25,000-4,892) X 5%]	1,005
	To Finance income (interest)		1,005
	(Being interest on lease recorded)