Question

Cool Equip Corp leased equipment to Hy Marx Co.and recorded a lease of $600,000 in a 10-year sales-type lease. The cost of the equipment to Cool Equip Corp was $475,000. Lease payments are made annually at January 1 of each year beginning January 1, 2018. The interest rate charged by the lessor is 10%.

Required: Prepare the appropriate journal entries on January 1, 2018 for Cool Equip Corp.

Answer 1

The lease is considered as finance lease as the lease amount covers the cost of the asset.

Journal Entry on jan 1st 2018

Hy Marx Co A/c Dr 475000

To Equipment A/c 475000

(Being asset given on lease with profit)

600000 will be recoverd over a 10 year period so every year an amount of 60000 payment is made and it includes interest.

01/jan/2018 Bank A/c Dr 60000

To Hy Marx Co. A/c 47500

To interst on lease A/c 4750

To profit on sale of lease 7750  

being lease payment amount is distributed among principal amount and interest

therefore total amount of lease is for 600000 and cost of asset is 475000 and the difference amount is treated as interest and profit.

so the interest amount is 475000*10% = 47500

profit = 600000-475000-47500=77500 which is defferd over 10 years as 7750 which is credited to p&l ac every year

profir is recognised only on the receipt of payment.