Question

James Company specializes in leasing large storage units to other businesses. James entered a contract to lease a storage unit to Whiskey, Inc. for 4 years when that particular storage unit had a remaining useful life of 5 years. The fair value of the unit was $12,000 at the commencement of the lease on January 1, 2017. The present value of the five equal rental payments of $3,002 at the start of each year, plus the present value of a guaranteed residual value of $1,000, equals the fair value of $12,000, James’ implicit rate of return on the lease of 5%. The following is an incomplete amortization schedule.
Date
Lease Payment
Interest (at 5%)
Reduction of Lease Receivable
Balance of Lease Receivable
1/1/17

$12,000
1/1/17

1/1/18

1/1/19

1/1/20

12/31/20

Totals

a. Complete the amortization schedule above.

b. Given the above schedule, make the appropriate entries at December 31, 2020, to record the accrual of interest and the return of the storage unit to James (assuming the unit is returned on December 31, 2020, at the expected and guaranteed residual value of $1,000). (hint: last interest amount and return of asset)

Answer 1

a) Amortization Schedule of Lease Receivable (Amounts in $)

Date	Lease Payment (A)	Interest (at 5%) (B)	Reduction of Lease Receivable (C - A-B)	Balance of Lease Receivable
1/1/17				12,000
1/1/17	3,002	0	3,002	8,998
1/1/18	3,002	450 (8,998*5%)	2,552	6,446
1/1/19	3,002	322 (6,446*5%)	2,680	3,766
1/1/20	3,002	188 (3,766*5%)	2,814	952
12/31/20	1,000	48 (952*5%)	952	0
Totals	13,008	1,008	12,000

b) Journal Entries (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
12/31/20	Lease Receivable	48
	Interest revenue		48
	(To record accrual of interest)
12/31/20	Equipment	1,000
	Lease receivable		1,000
	(To record the residual value of asset)