Question

The lease term is the contractual lease term modified by any renewal or termination options that are reasonably certain to be exercised or not exercised. Options whose exercise is under the control of the lessor are automatically included. Lease payments include payments resulting from those options as well as excess guaranteed residual values. The calculation of the present value of lease payments at the beginning of the lease does not include any variable lease payments, unless those payments are “in-substance fixed payments” or if they are based solely on an index or rate

On January 1, Year 1, Manlier Inc. leased equipment costing $45,000 to one of its customers. The sales-type lease agreement specifies six annual payments of $15,000 beginning on that date. The present value of the annual lease payments is $73,619. At the end of the lease, the equipment will be returned to Manlier and is expected to have a residual value of $5,000. The present value of that residual value is $2,822. Complete the appropriate journal entry recorded by Manlier at the beginning of the lease.

Record the entry at the beginning of the lease.

Note: Enter debits before credits.

Event	General Journal	Debit	Credit
01	Lease receivable

Answer 1

Present value of the annual lease payments			73619
Present value of that residual value			2822
Total present value			76441
Event	General journal	Debit	Credit
Jan, Year 1	Lease receivable	76441
	Cost of goods sold	45000
	Sales revenue		76441
	Inventory		45000
	(To record lease agreement and cost of goods of sold under sales type lease.)
Jan, Year 1	Cash	15000
	Lease receivable		15000
	(To record cash receipt from lease receivable.)
	Please note that interest revenue not applicable on first lease payment because date of lease agreement and date of lease payment is same.