Prepare journal entries in the accounts of abc truck

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Reference no: EM132794000

ACCOUNTING FOR LEASES

ABC Truck Builders frequently uses long-term lease contracts to finance the sale of its trucks.
On November 1, 2011, ABC Truck Builders leased to XYZ, a truck carried in the perpetual inventory records at $33,520. The terms of the lease call for XYZ to make 36 monthly payments of $1,400 each, beginning on November 30, 2011. The present value of these payments, after considering a built-in interest charge of 1 percent per month, is equal to the regular $42,150 sales price of the truck. At the end of the 36-month lease, title to the truck will transfer to XYZ.

Instructions:

Problem a. Prepare journal entries for 2011 in the accounts of ABC Truck Builders on:

1. November 1, to record the sale financed by the lease and the related cost of goods sold. (Debit Lease Payments Receivable for the $42,150 present value of the future lease payments)

2. November 30, to record receipt of the first $1,400 monthly payment. (Prepare a compound journal entry that allocates the cash receipt between interest revenue and reduction of Lease Payments Receivable. The portion of each monthly payment recognized as interest revenue is equal to 1 percent of the balance of the account Lease Payments Receivable, at the beginning of that month. Round all interest computations to the nearest dollar.)

3. December 31, to record receipt of the second monthly payment.

Reference no: EM132794000

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