Question
On January 1, 2017, Crane Company leased equipment to Flynn Corporation. The following information pertains to this lease:
Both the lessor and the lessee’s accounting periods end on December 31.
1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $7,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2017. 3. The fair value of the equipment on January 1, 2017, is $130,000, and its cost is $100,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Crane set the annual rental to ensure a 5% rate of return. Flynn’s incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable. Prepare all the necessary journal entries for Crane for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to o decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit 1/1/17 TLease Receivable 130002 Cost of Goods Sold 100000 Sales Revenue 130002 100000 To record the lease)
Explanation / Answer
1/1/2017 Lease receivable 130000 Cost of goods sold 100000 Sales revenue 130000 Inventory 100000