Question

Kingbird Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Blossom Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Blossom has the option to purchase the equipment for $15,000 upon termination of the lease. It is not reasonably certain that Blossom will exercise this option.
2.		The equipment has a cost of $100,000 and fair value of $120,000 to Kingbird Leasing. The useful economic life is 2 years, with a residual value of $15,000.
3.		Kingbird Leasing desires to earn a return of 5% on its investment.
4.		Collectibility of the payments by Kingbird Leasing is probable.

Prepare the journal entries on the books of Kingbird Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20
12/31/20
12/31/21

Assuming that Blossom exercises its option to purchase the equipment on December 31, 2021, prepare the journal entry to record the sale on Kingbird Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
12/31/21

Answer 1

Kingbird leasing Company
1	Computations of annual payments:
2	Cost (fair Value) Of leased asset to lessor	120000
3	Less: present value of salvage value 15000*0.90703	13605
	amount to he recovered through lease payments	106395
	Two periodic lease payments: 106395/1.85941	57220
Date	Account Titles and Explanation	Debit	Credit
1/1/2020	Lease receivable	120000
	Equipment		120000
12/31/2020	Cash	57220
	Lease receivable		51220
	Interest revenue		6000
12/31/2021	Cash	57220
	Lease receivable		53781
	Interest revenue		3439

Lease amortization schedule
1/1/2020				120000
12/31/2020	57220	6000	51220	68780
12/31/2021	57220	3439	53781	14999
		9439

b
12/31/2021	Cash	15000
	Lease receivable		15000