Concord Company, a machinery dealer, leased manufacturing equipment to Mays Corporation on January 1, 2017. The lease is for a 7-year period and requires equal annual payments of $26,143 at the beginning of each year. The first payment is received on January 1, 2017.
Concord had purchased the machine during 2016 for $75,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Concord. Concord set the annual rental to ensure an 8% rate of return.
The machine has an economic life of 8 years with no residual value and reverts to Concord at the termination of the lease.
Required:
1. Compute the amount of the lease receivable. (Round present value factor calculations to 5 decimal places, e. g. 1.25124 and the final answer to 0 decimal places e. g. 58,971.)
2. Prepare all necessary journal entries for Headland for 2017. (Round answers to decimal places e. g. 5,125.)

Answer and Explanation:

1. The computation of lease receivable is shown below:-

Amount of Lease Receivable = Present value amount i.e calculated by using the present value formula shown in the spreadsheet

Given that

Rate = 8%

NPER = 7 years

PMT = $26,143

FV = $0

The formula is

= -PV(RATE;NPER;PMT;FV;TYPE)

After applying this above formula, the present value is $146,998.94

2. Now The Journal entry is shown below:-

a. Lease Receivable A/c Dr,  $146,998.94

   Cost of Goods Sold  Dr, $75,000

                To Inventory A/c  $75,000

                To Sales  $146,998.94

(Being lease receivable is recorded)

Here we debited the lease receivables and cost of goods sold as it increased the assets and expenses  and we credited the inventory and sales as  it reduced the assets and increased the revenues

b. Cash A/c Dr, $26,143

                To Lease receivable A/c $26,143

(Being the first payment of lease is recorded)

For recording this we debited the cash as it increased the sales and credited the lease receivables as it decreased the assets

c. Interest Receivable A/c Dr, $9,668.432   {($146,998.4 - $26,143) × 8%}

              To Interest Income A/c $9,668.432

(Being accrued interest is recorded)

For recording this we debited the cash as it increased the sales and credited the interest income and it increased the revenue