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Determining a Lease

Kingdom Leasing Inc. agrees to lease jousting equipment to Knight Inc. on Jan 1, 2012. They agree on the following terms:

1) The normal selling price of the jousting equipment is $325000 and the cost of the asset to Kingdom Leasing Inc. was $250000.
2) Knight will pay all maintenance, insurance and taxes costs directly and annual payments of $60000 on Jan 1 each year.
3) The lease begins on Jan 1, 2012 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.

a) Determine what type of lease this would be for the lessor 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 2012. Assume a calendar year fiscal year.

Solution Summary

This solution illustrates how to determine the type of a lease a leasing agreement represents, the journal entry for the arrangement, and the amortization schedule for the lease.