On January 1,2014,Logan Company leased a machine to Glasgow Company.The machine had an original cost of $60,000.The lease term was five years and the implicit interest was on the lease was 15 percent.The lease is properly classified as a direct-financing lease.The annual lease payments of $17,306 are made each December 31.The machine reverts to Logan at the end of the lease term,at which time the residual value of the machine will be $4,000.The residual value is not guaranteed. At the inception of the lease,the balance of Logan's net receivable and Glasgow's liability would be
Logan Receivable Glasgow Liability
A) $60,000 $60,000
B) $58,011 $58,011
C) $60,000 $58,011
D) $58,011 $60,000

Question

Quizplus · Accepted Answer

Since the lease is a direct-financing lease, Logan Company needs to record the lease receivable and Glasgow Company needs to record the lease liability at the present value of the lease payments. 
Using the formula to calculate the present value of an annuity of $1, we can find the present value of the lease payments: 
PV = Payment x [(1 - (1 / (1 + interest rate)^n)) / interest rate] 
Where:
Payment = $17,306
Interest rate = 15%
n = 5
PV = $66,445

Therefore, Logan should initially record a lease receivable of $66,445 ($60,000 cost + $6,445 present value of lease payments) and Glasgow should initially record a lease liability of $66,445.

However, we also need to take into account the residual value of $4,000. Since this amount is not guaranteed, we cannot include it in the initial calculation of the lease receivable and lease liability.

Therefore, Logan's net receivable and Glasgow's liability would be the same at the inception of the lease, and equal to the present value of the lease payments:
Logan receivable = $66,445 - $4,000 (residual value) = $62,445
Glasgow liability = $62,445

On January 1,2014,Logan Company Leased a Machine to Glasgow Company