Question

Rambler Company leased a machine from Basket Leasing Company. The lease is for 4 years. The life of the asset is 4 years. The terms of the lease require 4 payments of $100,000 at the beginning of the year, beginning on January 1, 2018. The lease is non-cancelable. Rambler's incremental borrowing rate is 8% and knows Basket's 6% rate of return. There is an ungauranteed residual value of $12,000 at the end of year 4. At the end of year 4, the equipment is worth $10,000. Rambler also assumes property tax expense of $1,000 per year paid to Basket. The lease is a direct financing lease.

On the books of Basket,

a. Prepare an amortization schedule for the lease receivable.

b. Record the inception of the lease and receipt of the first payment on January 1, 2018.

c. Record the last payment in year 4 and the return of the equipment.

Answer 1

A) amortization schedule for the lease receivable

End of Year	Opening	Lease Payment	Interest	Principal	Closing	PV Factor	PV Lease Flow
0	3,67,301	1,00,000	-	1,00,000	2,67,301	1	1,00,000
1	2,67,301	1,00,000	16,038	83,962	1,83,339	0.943396	94,340
2	1,83,339	1,00,000	11,000	89,000	94,339	0.889996	89,000
3	94,339	1,00,000	5,660	94,340	-	0.839619	83,962
							3,67,301

b) On January 1, 2018 Journal Entry

Lease Receivable A/c Dr $367,301

To Asset A/c $367,301

Cash A/c Dr $100,000

To Lease Receivable A/c $100,000

C) Last payment in year 4

Cash A/c Dr   $100,000

To Lease Receivable A/c $ 94,340

To Finance Income A/c $ 5,660