South Bend Corporation purchased equipment in December 2013 for $150,000. South Bend leased the equipment to the Kansas Company on January 1, 2014. Lease payments of $43,000 are to be made at the end of each year for six years. The present value of the minimum lease payments at 14% interest is $167,212.72 at the time of the lease. At the end of the lease term, ownership of the equipment will be transferred to Kansas. The collectibility of the lease payments is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
Required:
a.Classify the lease from the South Bend Corporation's standpoint.
b.Prepare the 2014 journal entries regarding the lease for the South Bend Corporation.

Question

South Bend Corporation purchased equipment in December 2013 for $150,000. South Bend leased the equipment to the Kansas Company on January 1, 2014. Lease payments of $43,000 are to be made at the end of each year for six years. The present value of the minimum lease payments at 14% interest is $167,212.72 at the time of the lease. At the end of the lease term, ownership of the equipment will be transferred to Kansas. The collectibility of the lease payments is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
Required: 
a.Classify the lease from the South Bend Corporation's standpoint.
b.Prepare the 2014 journal entries regarding the lease for the South Bend Corporation.

Quizplus · Accepted Answer

The Answer of South Bend Corporation purchased equipment in December 2013 for $150,000. South Bend leased the equipment to the Kansas Company on January 1, 2014. Lease payments of $43,000 are to be made at the end of each year for six years. The present value of the minimum lease payments at 14% interest is $167,212.72 at the time of the lease. At the end of the lease term, ownership of the equipment will be transferred to Kansas. The collectibility of the lease payments is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
Required: 
a.Classify the lease from the South Bend Corporation's standpoint.
b.Prepare the 2014 journal entries regarding the lease for the South Bend Corporation.

South Bend Corporation Purchased Equipment in December 2013 for $150,000