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Question: A lease agreement between Lennox Leasing Company and Gill Company is described in IFRS21-10. Refer to the data in IFRS21-10 and do the following for the lessor.

Inception date: May 1, 2017

Annual lease payment due at the beginning of each year, beginning with May 1, 2017: \(18,829.49

Bargain-purchase option price at end of lease term: \)4,000.00

Lease term: 5 years

Economic life of leased equipment: 10 years

Lessor’s cost: \(65,000.00; fair value of asset at May 1, 2017, \)81,000.00

Lessor’s implicit rate: 10%; lessee’s incremental borrowing rate 10%

The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2017, 2018, and 2019. The lessor’s accounting period ends on December 31. Reversing entries are not used by Lennox.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Lease Receivable

Any and all rents, payments, and other amounts (including, without limitation, any sales or use taxes, supplementary rent payments, additional rent payments, rental stores, engine stores, maintenance stores, and maintenance) under or in connection with the lease) is known as a lease receivable.

02

Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
May 5, 2017	Lease Receivable	81,000.00
	Cost of Goods Sold	65,000.00
	Sales Revenue		81,000.00
	Inventory		65,000.00
May 5, 2017	Cash	18,829.49
	Lease Receivable		18,829.49
Dec. 31, 2017	Interest Receivable	4,144.70
	Interest Revenue		4,144.70
May 5, 2018	Cash	18,829.49
	Lease Receivable		12,612.44
	Interest Receivable		4,144.70
	Interest Revenue		2,072.35
Dec.31,2018	Interest Receivable	3,303.87
	Interest Revenue		3,303.87
May 5, 2019	Cash	18,829.49
	Lease Receivable		13,873.68
	Interest Receivable		3,303.87
	Interest Revenue		1,651.94
Dec. 31, 2018	Interest Receivable	2,378.96
	Interest Revenue		2,378.96

Working notes:

Calculation of interest revenue on Dec. 31, 2017

$\begin{array}{c}\mathrm{Interest}\mathrm{revenue}=\mathrm{Interest}\mathrm{on}\mathrm{lease}\mathrm{receivable}×\mathrm{Total}\mathrm{month}\\ =\$6,217.05×\frac{8}{12}\\ =\$4,144.70\end{array}$

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