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Morgan Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2. The cost of the asset to the lessor is \(245,000. The fair value of the asset at January 1, 2017, is \)245,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed.
4. Cole Company assumes direct responsibility for all executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2017.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Instructions

(Round all numbers to the nearest cent.)

(c) Prepare all of the journal entries for the lessor for 2017 and 2018 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting period ends on December 31.

Step by step solution

01

Meaning of Lease

A lease is a legally binding contract between a lessor and a lessee. The lessee has been given the right to use certain property owned by the lessee for the period specified under this agreement. The lessee pays the lessee rent payments over the term of the lease in exchange for the use of the asset.

02

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
1/11/17	Lease Receivable	245,000
	Equipment		245,000
1/1/17	Cash	46,000
	Lease Receivable		46,000
12/31/17	Interest Receivable	19,900
	Interest Revenue		19,900
1/1/18	Cash	46,000
	Lease Receivable		26,100
	Interest Receivable		19,900
12/31/18	Interest Receivable	17,290
	Interest Revenue		17,290

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