Question

Metlock Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to BonitaCompany. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Bonita Company has the option to purchase the equipment for $16,400 upon termination of the lease.
2.		The equipment has a cost and fair value of $148,000 to Metlock Leasing Company. The useful economic life is 2 years, with a salvage value of $16,400.
3.		Bonita Company is required to pay $4,900 each year to the lessor for executory costs.
4.		Metlock Leasing Company desires to earn a return of 8% on its investment.
5.		Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

(a) Prepare the journal entries on the books of Metlock Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.

(b) Assuming that Bonita Company exercises its option to purchase the equipment on December 31, 2018, prepare the journal entry to reflect the sale on Metlock’s books

Answer 1