Answer:
1) January 1, 2018, asset leased
Dr Lease receivable 550,000
Cr Equipment 550,000
January 1, incremental costs associated with lease transaction
Dr Lease receivable 6,652
Cr Cash 6,652
January 1, 2018, first lease payment collected
Dr Cash 200,000
Cr Lease receivable 200,000
2) to calculate the effective rate we can use the present value of an annuity due formula
PV annuity due factor, 3 periods, ?% = present value of lease receivable / annual payment = $556,652 / $200,000 = 2.78326
Now we must use an annuity due table to determine a possible rate. In this case, the exact rate is 8%.
3) December 31, 2018, interest receivable on lease contract
Dr Interest receivable 28,532
Cr Interest revenue 28,532
interest receivable = ($556,652 / $200,000) x 8% = $28,532
