Third Party Guarantees of Residual Value
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 guaranteed residual value of $3,000 at the end of five years. The fair value on the date of the lease signing is equal to the present value of the lessor’s minimum payments; the interest rate implicit in the lease is 10%. The equipment has a useful life of eight years, there is no bargain purchase option, and the title does not transfer at the end of the lease term. Also, the residual value is guaranteed by a third party insurance company, not by the lessee company. Make the journal entries necessary to record the lease signing, including the first lease payment, (1) on the books of the lessor company and (2) on the books of the lessee company.