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| 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, insuranceand 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 noncancelable 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. | |
| Required: | |
| 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. | |
Problem 2:(The data given in problems # 1 is used here)
| 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, insuranceand 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 noncancelable 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. | |
| Required: | |
| a) Determine what type of lease this would be for the lessee and calculate the initial obligation. | |
| b) Prepare Knight Inc.’s amortization schedule for the lease terms. | |
| c) Prepare all the journal entries for Knight Inc. for 2012. Assume a calendar year fiscal year. | |