Question

Use the information for Lai Corporation from_

Lai Corporation, which uses ASPE, leased equipment it had specifically purchased at a cost of $175,000 for Swander, the lessee. The term of the lease is six years, beginning January 1, 2017, with equal rental payments of $33,574 at the beginning of each year. Swander pays all executory costs directly to third parties. The equipment's fair value at the lease's inception is $175,000. The equipment has a useful life of seven years with no residual value. The lease has an implicit interest rate of 6%, no bargain purchase option, and no transfer of title. Collectibility is reasonably assured, with no additional costs to be incurred by Lai. Using tables, a financial calculator, or Excel functions, calculate the present value of the lease payments and prepare Lai Corporation's January 1, 2017 journal entries at the inception of the lease. Round amounts to the nearest dollar.

_Assume that, instead of costing Lai $175,000, the equipment was manufactured by Lai at a cost of $137,500 and the equipment's regular selling price is $175,000. Prepare Lai Corporation's January 1, 2017 journal entries at the inception of the lease and the entry at December 31, 2017 to record interest.

Answer 1

Present value of Lease payments

Annual rate of Interest - 6%

Lease period - 6 Years

Lease rentals per year - $33,574

Present value - PV(6%,6,-33574,1)

- $165,093

Journal entries in Lai books:

January 1, 2017

1) Lease receivable account Debit $165,093

Asset account Credit $165,093

At the time of first payment, on record of receipt of cash, reduction in lease receivable:

2) Cash account Debit $ 33,574

Lease receivbale account Credit $ 33,018

($165093/6)

Finance income account Credit $ 556