Question

Need help with the last two questions on problem 3: Interest Revenue and Lease Receivable

On January 1, 2021, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $956,000 and has an expected useful life of five years. Allied expects the residual value at December 31, 2024, will be $300,000. Negotiations led to the lessee guaranteeing a $340,000 residual value. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Equal payments under the finance/sales-type lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Karrier is aware that Allied used a 5% interest rate when calculating lease payments. Required: 1. Prepare the appropriate entries for both Karrier and Allied on January 1, 2021, to record the lease. 2. Prepare all appropriate entries for both Karrier and Allied on December 31, 2021, related to the lease. X Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required Required Prepare all appropriate entries for both Karrier and Allied on December 31, 2021, related to the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to nearest whole dollar.) Credit No 1 Date General Journal December 3 Interest expense Lease payable Cash Debit 37,105 162,895) 200,000 2 185,525 December 31Amortization expense Right-of-use asset 185,525 3 200,000 December 3 Cash Interest revenue | Lease receivable 37,105 X 162,895 < Required 1 Required 2

Answer 1

Prepare the journal entries on January 1, 2021 as follows: Date Jan. 1 Accounts name and explanation Right of use asset Lease payable $742,098 $742,098 Jan. 1 $988,908 Lease receivable Equipment $988,908 Working note: PV of lease payments for lessee = PV of periodic lease payments + PV of excess lessee guranteed residual value = 200.000 1- (1+0.05)) (340,000 - 300,000) 0.05 na (1+0.05)* = (200,000 x 3.54595) + (40,000 0.82270) = $742,098 PV of lease payments for lessor= (PV of periodic lease payments + PV of residual value + PV of excess lessee guranteed residual value (200.000 300.000 x 1-(1+0.05) + + 1 0.05 ) ((1+0.05) (340.000 - 300.000) + 1 (1+0.05) (200.000 x 3.54595) +(300.000 ~ 0.82270) + (40.000 ~ 0.82270) = $988,908

Prepare the journal entries on December 31, 2021 as follows: Credit Date Accounts name and explanation Dec. 31 Interest expense (742098 x 5%) Lease payable Cash Debit $37,105 $162,895 $200,000 $185,525 Dec. 31 Amortization expense (742098/4) Right of use asset $185,525 $200,000 Dec. 31 Cash Lease receivable Interest revenue (988908 x 5%) $150,555 $49,445