Question

Indiana Jones Corporation enters into a 6-year lease of equipment on December 31, 2019, which requires 6 annual payments of $40,000 each, beginning December 31, 2019. In addition, Indiana Jones guarantees the lessor a residual value of $20,000 at the end of the lease. However, Indiana Jones believes it is probable that the expected residual value at the end of the lease term will be $10,000. The equipment has a useful life of 6 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $180,000.

Prepare Lost Ark’s 2019 and 2020 journal entries, assuming the implicit rate of the lease is 6% and this is known to Indiana Jones.

Answer 1

Answer:-

  12/31/19
Lease Receivable .......................................................... 222,593*
Cost of Goods Sold ....................................................... 180,000
Sales Revenue ........................................................ 222,593
Inventory ................................................................. 180,000

*([$40,000 X 5.21236] + [$20,000 X .70496])

Cash ................................................................................ 40,000
Lease Receivable ................................................... 40,000

12/31/20
Cash ................................................................................ 40,000
Lease Receivable ................................................... 29,044
Interest Revenue [($222,593 – $40,000) X .06] ...... 10,956