Determining Type of Lease and Subsequent Accounting
Response to the following problem:
The Ravis Rent-A-Car Company leases a car to Ira Reem, an employee, on January 1, 2010. The term of the noncancelable lease is four years. The following information about the lease is provided:
1. Title to the car passes to Ira Reem on the termination of the lease with no additional payment required by the lessee.
2. The cost and fair value of the car to the Ravis Rent-A-Car Company is $8,400. The car has an economic life of five years.
3. The lease payments are determined at an amount that will yield Ravis Rent-A-Car Company a rate of return of 10% on its net investment.
4. Collectibility of the lease payments is reasonably assured.
5. There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
6. Equal annual lease payments are due at the end of each year.
Required:
1. What type of lease is this to Ravis Rent-A-Car Company? Why?
2. Prepare a table summarizing the lease receipts and interest revenue earned by the Ravis Rent-A-Car Company for the four-year lease term.
3. Prepare the journal entries for 2010 and 2011 to record the lease agreement, the lease receipts, and the recognition of income on the books of Ravis Rent-A-Car Company.