Question

Kingbird Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Blossom Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Blossom has the option to purchase the equipment for $15,000 upon termination of the lease. It is not reasonably certain that Blossom will exercise this option.
2.		The equipment has a cost of $100,000 and fair value of $120,000 to Kingbird Leasing. The useful economic life is 2 years, with a residual value of $15,000.
3.		Kingbird Leasing desires to earn a return of 5% on its investment.
4.		Collectibility of the payments by Kingbird Leasing is probable.

a) Prepare the journal entries on the books of Kingbird Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)

b) Assuming that Blossom exercises its option to purchase the equipment on December 31, 2021, prepare the journal entry to record the sale on Kingbird Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

sollution 1
Date	Account Titles	Debit	Credit
1/1/2020	Lease receivable	$120,000.00
	Cost of goods sold	$86,395.00
[100,000-13605]
	Sales revenue		$106,395.00
	Inventory		$100,000.00
12/31/2020	Cash	$57,220.00
	Lease receivable		$51,220.00
	Interest revenue		$6,000.00
[120,000*5%]
12/31/2021	Cash	$57,220.00
	Lease receivable		$53,781.00
	Interest revenue		$3,439.00
[120,000 - 51220]*5%
sollution 2
Date	Account Titles	Debit	Credit
12/31/2021	Cash(120000-51220-53781)	$14,999.00
	Lease receivable		$14,999.00
Workings:
	Present value of fair value	$120,000.00
	Less: Present value	$13,605.00
	[15000 * 0.90703]
	Present value of lease payments	$106,395.00
	Lease payment	$57,220.00
	[106,395/1.85941]