Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million.
This noncancelable lease had the following terms:
Lease payments: $2,466,754 semiannually; first payment at January 1, 2018; remaining payments at June 30 and December 31 each year through June 30, 2022.
Lease term: five years (10 semiannual payments).
No residual value; no purchase option.
Economic life of equipment: five years.
Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.
Fair value of the computers at January 1, 2018: $20 million.

Prepare the journal entries for both Technoid. inc and Lone Star company on Jan 1st, 2018, at the beginning of the lease.

Answer 1

Lessee (Lone Star company)
Journal entries
Date	General Journal	Debit	Credit
January 1, 2018	Right of use Asset	$        20,000,000
	Lease liability		$       20,000,000
	(To record the lease)
January 1, 2018	Lease liability	$          2,466,754
	Cash		$         2,466,754
	(to record Lease liability paid)
Lessor (Technoid. Inc)
Journal entries
Date	General Journal	Debit	Credit
January 1, 2018	Lease receivable	$        20,000,000
	Cost of goods sold	$        12,000,000
	Sales revenue		$       20,000,000
	Inventory		$       12,000,000
	(To record lease agreement for sales type lease.)
January 1, 2018	Cash	$          2,466,754
	Lease Receivable		$         2,466,754
	(To record Lease payment received.)