Answer:
a. The annual lease payment would be $90,131
b. Dr. Cr.
In Books of Lessor
1 Jan,2017
Lease Receivable $650,000
Cost of goods sold $450,000
To sales revenue $650,000
To Inventory $450,000
31 Dec,2017
Cash $90,131
To Lease Receivable $38,131
To interest revenue $51,869
In Books of Lessee
1 Jan,2017
Purchase $650,000
To Lease payable $650,000
31 Dec,2017
Interest expense $51,869
Lease payable $38,131
To cash $90,000
Explanation:
a. To calculate the annual lease payment we woud have to use the following formula:
Annual lease payment = [Fair value of each trailer * Number of trailer given in lease] / PVAF(8%,6 years)
Present Value Factor
0 1.000000
1 0.925926
2 0.857339
3 0.793832
4 0.735030
5 0.680583
Total 4.992710
Cost of each Tractor= $45,000
No. of Tractor=10
Therefore, Total Cost=45,000
×10= $450,000
Therefore, annual lease payment=$450,00/4.992710
annual lease payment=$90,131
b. The journal entries for both the lessee and lessor for 2020 to record the lease agreement and the year-end entries would be as follows:
Dr. Cr.
In Books of Lessor
1 Jan,2017
Lease Receivable $650,000
Cost of goods sold $450,000
To sales revenue $650,000
To Inventory $450,000
31 Dec,2017
Cash $90,131
To Lease Receivable $38,131
To interest revenue $51,869
In Books of Lessee
1 Jan,2017
Purchase $650,000
To Lease payable $650,000
31 Dec,2017
Interest expense $51,869
Lease payable $38,131
To cash $90,000
Lease Amortisation Schedule
Interest on Lease Receivable 31 December=8%*650,000=
$52,000
Annual lease Rental=$90,131
Receivable Recovery=$90,131-$52,000=$38,131
