Problem 1: Kingdom Leasing Inc. agrees to lease jousting equipment to Knight Inc. on Jan 1, 2014. They agree on the following terms:
1) The normal selling price of the jousting equipment is $410000 and the cost of the asset to Kingdom Leasing Inc. was $250000.
2) Knight will pay all maintenance, insurance, and tax costs directly and annual payments of $60000 on Jan 1 each year.
3) The lease begins on Jan 1, 2014 and payments will be in equal annual installments.
4) The lease is non-cancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).
5) At the end of the lease, the jousting ring will revert to Kingdom Leasing Inc. and have an unguaranteed residual value of $30000. Their implicit interest rate is 10%.
6) Kingdom Leasing, Inc. incurred costs of $6500 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable.
Required:
a) Determine what type of lease this would be for Kingdom Leasing Inc. and calculate the following: (Show all work.)
Lease Receivable
Sales Price
Cost of Sales
b) Prepare Kingdom's amortization schedule for the lease terms.
c) Prepare all the journal entries for Kingdom for 2014. Assume a calendar year fiscal year.
Problem 2: Use the data given in Problem #1 and answer the required questions to record the lease in the Knight Inc.'s books.
Required:
a) Determine what type of lease this would be for the lessee and calculate the initial obligation.
b) Prepare Knight Inc.'s amortization schedule for the lease terms.
c) Prepare all the journal entries for Knight Inc. for 2014. Assume a calendar year fiscal year.