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8 February, 20:15

Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2017. The lease agreement called for annual rental payments of $4,892 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000, and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Rauch set the lease payments with the intent of earning a 5% return, and Donahue is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

Suppose Donahue incurs initial direct costs of $750 related to the lease. Prepare the journal entries for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manu

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  1. 8 February, 20:44
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    PART-1)

    Fair value of leased asset to lessor = 25,000

    Minus: PV of un-guaranteed residual value $8,250 X 0.82270 = 6,787

    Amount to be recovered through lease payments = 18,213

    Four periodic lease payments ($18,213 / 3.72325) = 4,892

    PART-2)

    01/01/2017

    Debit: Cash = 4,892

    Credit: Unearned Lease Revenue = 4,892

    12/31/2017

    Debit: Unearned Lease Revenue = 4,892

    Credit: Lease Revenue = 4,892

    12/31/2017

    Debit: Depreciation Expense = 3,333

    Credit: Accumulated Depreciation - Equipment = 3,333
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