Question

Assume that IBM leased equipment that was carried at a cost of $182,000 to Sharon Swander Company. The term of the lease is 7 years beginning January 1, 2017, with equal rental payments of $31,561 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $182,000. The equipment has a useful life of 7 years with no salvage value. The lease has an implicit interest rate of 7%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM.Prepare IBM’s January 1, 2017, journal entries at the inception of the lease.

Answer 1

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	Present value of Lease payments of 31561	31561*PVAF 7%, 7 Year			Year	PVF (1/(1.07)^Year)
		31561*5.7665			0	1.0000
	Present Value of annual lease payment	182000			1	0.9346
					2	0.8734
	Since PV of annual lease payment is equal to Fair value and life also equal to lease term, its capital lease.				3	0.8163
					4	0.7629
	Journal entry on Jan 1 2017				5	0.7130
					6	0.6663	5.7665
Date	Account	Debit	Credit		7	0.6227
Jan 1 2017	Lease Receivable	182000
	Equipment		182000
	(Booked lease receivable at inception)
Jan 1 2017	Cash	31561
	Lease Receivable		31561
	(Received first lease amount on inception)