Reference no: EM13599060

On July 1, 2010, Alice Hanna decided she needed a new car. She went to the local auto dealer and agreed on a price of $37.000 for a new car. The dealer was pleased because he paid $30,000 for the car. On learning that Alice wanted to lease the vehicle, the dealer arranged for a local finance company to set up the lease agreement. The dealer then sold the car to the Finance Company for $37,000. The lease provided that $10,000 would be payable annually, with the first payment due at lease inception on July 1, 2010 and then $12,000 due on June 30, 2013. The implicit rate of the lease is 6%.

The Finance Company agreed to pay for the insurance and maintenance on the vehicle, the later to be carried out by the Dealer at regular intervals. The cost of these services is valued at $3,000 per year and is billed to Jane annually, in addition to the annual lease payment, as a reimburseable revenue.

The vehicle had an expected useful life of seven years. The expected residual value of the vehicle at June 30, 2013 was $12,000.Costs of maintenance and insurance incurred by the Finance company over the years ended June 30, 2011, to June 30, 2013 were $2810, $3020, $2750 respectively. At June 30, 2013, Alice returned the vehicle to the Finance company, which sold the vehicle for $9,000 on July 5, 2013, and invoiced Alice Hanna for the appropriate balance. Alice subsequently paid the debt on July 13, 2013.

Required:

1. Assume the lease is classified as a finance lease, prepare the journal entries in the books of the Finance company, the lessor, in relation to the lease from July 1, 2010 to July 31, 2013.

2. In relation to finance leases, explain why the balance of the asset account recorded by the lessee at the inception of the lease may differ from the balance of the receivable asset recorded by the lessor.