Sales Type Lease with a Bargain Purchase Option
On January 1, the lessor company purchased a piece of equipment for $6,000 as inventory. The lessor company immediately leased the equipment under a sales type lease agreement. The lease calls for the lessor company to receive five annual lease payments of $2,500 per year, to be received at the beginning of the year. In addition to the five annual payments of $2,500 at the beginning of each year, the lessor is to receive a bargain purchase option amount of $500 at the end of five years. The interest rate implicit in the lease is 12%. Make the journal entries necessary on the books of the lessor company to record (1) the lease signing (including receipt of the first lease payment) and (2) the recognition of interest revenue at the end of the first year.