Can anyone help me out with the journal entries for this?
Wiley pg. 462 number 21
Peg. Co leased equipment from Howe corp. on July 1, 2009 for an eight year period expiring June 30, 2017. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on july 1,2009. The rate of interest contemplated by Peg and Howe is 10%.The cash selling price of equipment is $3,520,000 and cost of equipment on Howe's accounting records is 2,800,000.The lease is appropriately recorded as a sales-type lease.what amount of profit on the sale and interest revenue that Howe should record for the year ended December 31,2009?
I understand that the profit and interest revenue are $720,000 and $146,000 but the Wiley answer is saying that the net lease receivable after the first payment is $2,920,000 ($3,520,000 – $600,000). Should the initial lease receivable be $600,000 * 8 payments? I'm just really confused with this problem…what would the journal entries look like? I think it's the net and gross thing that is throwing me off. I have:
dr. LR 4,800,000
dr COGS 2,800,000
cr. Sales 3,520,000
cr Equip 2,800,000
cr Unearned int. rev 1,280,000
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