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11 December, 17:25

Assume that IBM leased equipment that was carried at a cost of $193,000 to Ivanhoe Company. The term of the lease is 6 years December 31, 2019, with equal rental payments of $38,656 beginning December 31, 2019. The fair value of the equipment at commencement of the lease is $192,998. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title. Collectibility of lease payments for IBM is probable. Assume the sales-type lease was recorded at a present value of $192,998. Prepare IBM's December 31, 2020, entry to record the lease transaction with Ivanhoe Company. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e. g. 5,275.)

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  1. 11 December, 17:36
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    Answer and Explanation:

    The Journal entry is shown below:-

    Cash Account Dr, $38,656

    To Lease receivable $26,309

    To Interest income $12,347

    (Being lease payment received and interest earned is recorded)

    The amount of payment received is given at $38,656 to be sustained throughout the lease period. The cost transferred to lease receivable is the net amount after interest earned that is $38,656 - Interest income

    Working Note

    Interest Income - (Lease value at the time of start of lease - Payment made in the last year) * Implicit interest rate

    = ($192,998 - $38,656) * 8%

    = $154,342 * 8%

    = $12,347
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