On January 1, 2018, Sans Serif Publishers leased printing equipment from First LeaseCorp. First LeaseCorp purchased the equipment from CompuDec Corporation at a cost of $479,079. Sans Serif’s borrowing rate for similar transactions is 10%.
The lease agreement specifies four annual payments of $100,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 from 2018 through 2020. The useful life of the equipment is estimated to be six years. The present value of those four payments at a discount rate of 10% is $348,685.
Determine whether it is finance lease or operating lease and prepare journal entries for both lessor and lessee on January 1, 2018; 12/31/2018.
One of the principle thing which can determine whether a lease is Financial or operating. If the present value of the minimum lease payments is at least equal to the pv of the leased Equipment then it could be a financial lease. However I'm this case the PV $348,685 is less than the cost of the Equipment. So it is a operating lease . Now the journals are
For lessor: in operating lease the lease payments are like rentals for the lessor. So Entry is
Cash a/c Dr. $100,000
Lease Revenue a/c revenue Cr. $100,000
For lessee : it would be opposite to that of lessor as it will be an outflow of cash for Expense. So Entry is
Lease Expense A/c Dr. $100,000
Cash A/c Cr. $100,000
On January 1, 2018, Sans Serif Publishers leased printing equipment from First LeaseCorp. First LeaseCorp purchased...