Sales Type Lease—Lessor
Aquatran Incorporated uses leases as a method of selling its products. In early 2008, Aquatran completed construction of a passenger ferry for use between Manhattan and Staten Island. On April 1, 2008, the ferry was leased to the Manhattan Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. Annual lease payments do not include executory costs. Other terms of the agreement are as follows:
|
Original cost of the ferry |
$1,500,000 |
|
Fair market value of ferry at lease date |
$2,107,102 |
|
Lease payments (paid in advance) |
$ 225,000 |
|
Estimated residual value |
$ 78,000 |
|
Incremental borrowing rate—lessee |
10% |
|
Date of first lease payment |
April 1, 2008 |
|
Lease period |
20 years |
Instructions:
1. Compute the amount of financial revenue that will be earned over the lease term and the manufacturer’s profit that will be earned immediately by Aquatran.
2. Give the entry to record the signing of the lease on Aquatran’s books. Compute the implicit rate of interest on the lease.
3. Give the journal entries necessary on Aquatran’s books to record the lease for the first three years, exclusive of the initial entry. Aquatran’s accounting period is the calendar year.
4. Indicate the balance of Lease Payments Receivable at December 31, 2010.