Answer:
31-Dec-19
Dr. Lease receivables $
180,498
Cr. Sales revenue $180,498
Dr. Cost of goods sold $
170,000
Cr. Inventory $
170,000
Explanation:
The lease is recorded on the present value of all the payment to be made in the future.
We will use the present value of annuity formula
Present value of Lease = P [ ( 1 - ( 1 + r )^-n ) / r ]
where
P = annual payment = $40,100
r = implicit rate = 11%
n = numbers of payments = 6 payments
Placing values in the formula
PV of Lease = $40,100 x [ ( 1 - ( 1 + 11% )^-6 ) / 11% ] = $169,645
Now calculate the present value of guarantee residual value
PV of guarantee residual value = $20,300 x ( 1 + 11%)^-6 = $10,853
Fair value of lease = Present value of Lease payment + Present value of guarantee residual value
Fair value of lease = $169,645 + $10,853 = $180,498
Cost of equipment will be recorded in the cost of goods sold and Inventory as well.
We will pass two separate journal entries first to record the lease receivable and second to record the cost of the equipment.
