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Question No. 1 Leases Eagle River Inc. entered into a direct financing lease with Adolphe Leasing...

Question No. 1 Leases

Eagle River Inc. entered into a direct financing lease with Adolphe Leasing Company for equipment that has a fair value of $500,000. The term of the lease is 5 years and the useful life of the equipment is 8 years. The initial lease payment begins on March 1, 2020, with annual lease payments of $113,000 payable at the beginning of each lease year. Eagle River’s incremental borrowing rate is 7%. Adolphe’s pre-tax interest rate in the lease is 8%, but Eagle River is not aware of this rate. Eagle River amortizes equipment on a straight-line basis. Both companies have a December 31 fiscal year-end.

Required:

Prepare the journal entries for 2020 for the lessor and the lessee related to the direct financing lease.

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Answer #1

IN THE BOOKS OF LESSEE

DATE

PARTICULARS

L/F

DEBIT($)

CREDIT($)

March 1

Lease receivable

      To Unearned interest revenue

      To Machine

565000

65000

500000

March 1

Cash

      To Lease receivables

113000

113000

March 1

Unearned interest revenue (65000*7%)

      To interest revenue

4550

4550

Dec 31

Depreciation

      To Depreciation expense

66667

66667
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