Question

Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1.	The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $50,000 to be made at the end of each year.
2.	The equipment costs $130,000. The equipment has an estimated life of 4 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: ( can you please provide detail solutions)

1.	Next Level Determine if the lease is a sales-type or direct financing 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, the lessor, for the years 2016 and 2017.

Answer 1

The non cancellable lease is a sales type lease because it satisfies the conditions of, The lease term is for a major part of the economic life of the asset i.e 15 16 17 18 19 The present value of the minimum lease payments exceeds 90% of the fair value of the asset (1) Lease receivable at the inception of the lease Annual payments of S50,000 made at the end of the each period for 4years 1 Amount of Lease P.V 3.03735 151868 151868 Total P.V Total Present Value of minimum Lease payment (2) Sales price Sales price is the same as the minimum Lease payment i.e. $151868 3) Cost of sales 25 26 27 29 31 Cost of Sales is the cost price of Machine$130,000 32

Berne COMPANY (Lessor) Lease Amortization Schedule 34 35 36 Date 37 38 1/1/2016 39 12/31/2016 40 12/31/2017 4112/31/2018 42 12/31/2019 43 Interest (12%) on Lease Receivable Recovery of Lease Receivable Annual Lease Payment Lease Receivable 50000 50000 50000 50000 200000 18,224 14,411 10,140 5,357 48133 31,776 35,589 39,860 44,643 151867 151868 120,092 84,503 44,643

Amount $ Amount $ 45 Date 46 2016 47 48 49 50 51 52 53 54 31-Dec Particulars 1-Jan Lease Receivable 151,868 130,000 Cost of the goods sold Sales 151,868 130,000 Machine to record the lease receivabe) Cash (To record Lease Receivable) Cash To record interest receivable) 50,000 Lease Receivable 50,000 56 57 58 59 60 61 62 63 64 65 18,224 31-Dec Interest Revenue 18,224 2017 Cash (To record Lease Receivable) Cash 50,000 31-Dec Lease Receivable 50,000 14,411 67 31-Dec Interest Revenue 14,411