Lessee-Lessor Entries; Sales-Type Lease

E21-7 (L04) (Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2017, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease.

Thetermofthenoncancelableleaseis6years,withnorenewaloption.Theequipmentrevertstothelessoratthetermina- tion of the lease.

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Equal rental payments are due on January 1 of each year, beginning in 2017.

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The fair value of the equipment on January 1, 2017, is $150,000, and its cost is $120,000.

Theequipmenthasaneconomiclifeof8years,withanunguaranteedresidualvalueof$10,000.Flynndepreciatesallofits

equipment on a straight-line basis.

Bensensettheannualrentaltoensurean11%rateofreturn.Flynn’sincrementalborrowingrateis12%,andtheimplicit

rate of the lessor is unknown.

Collectibilityofleasepaymentsisreasonablypredictable,andnoimportantuncertaintiessurroundtheamountofcosts

yet to be incurred by the lessor.

Instructions

(Both the lessor and the lessee’s accounting period ends on December 31.)

(a) Discuss the nature of this lease to Bensen and Flynn.

(b) Calculate the amount of the annual rental payment.

(c) Prepare all the necessary journal entries for Flynn for 2017.

(d) Prepare all the necessary journal entries for Bensen for 2017.

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