Can someone check my answers.
A car dealership gives customers the choice of buying or leasing its cars. The cars cost $20,000 and are sold for $25,000. The standard lease contract is for four years, with the first payment made at the time the lease is signed. Annual payments are made on January 1, of each year. At the end of the lease, the lessee guarantees that the car will be worth $7,000. The dealership requires an 8 percent return on these leases.
Required- Prepare the journal entries (January 1 & December 31) for the dealership for the first year; assuming the car is leased on January 1. (Hint: Annual lease payment [25000-($7000*0.7350)]/3.5771=$5551
My answer:
Jan. 1
Lease Receivable 29204 (debit)
(5551*4+7000)
Sales 25000(credit)
Unearned Interest Income 4204(credit)
Jan. 1
Cost of sales 20000 (debit)
Inventory 20000 (credit)
Jan 1
Cash 5551 (debit)
Lease Receivable 5551 (credit)
Jan 1
Unearned Interest Income 2000 (debit)
Interest Income 2000 (credit)
(25000*.08)
Dec. 31 I wasn't sure how to accrue the interest income.
To check your answers, let's go through the journal entries for the first year:
1. January 1:
- Lease Receivable: $29,204 (debit)
- This is calculated as ($5,551 * 4) + $7,000. The lease payment is made annually, so the total lease receivable for the first year is $29,204.
- Sales: $25,000 (credit)
- This represents the revenue from selling the car. The selling price is higher than the cost price, resulting in a profit.
- Unearned Interest Income: $4,204 (credit)
- This is calculated as the difference between the lease receivable and the sales price. It represents the unearned interest income that will be recognized over the lease term.
2. January 1:
- Cost of sales: $20,000 (debit)
- This represents the cost of the car sold.
- Inventory: $20,000 (credit)
- The inventory account is reduced by the cost of the car sold.
3. January 1:
- Cash: $5,551 (debit)
- This is the annual lease payment made by the lessee.
- Lease Receivable: $5,551 (credit)
- The lease payment reduces the lease receivable balance.
4. January 1:
- Unearned Interest Income: $2,000 (debit)
- This represents the portion of interest income that will be recognized during the first year. It is calculated as 8% of the sales price ($25,000).
To accrue the interest income on December 31, you need to consider the passage of time. Assuming the lease has a year-end of December 31, you can calculate the accrued interest income for the year. Here's the journal entry:
5. December 31:
- Interest Income: $2,000 (debit)
- This represents the interest income recognized during the year.
- Unearned Interest Income: $2,000 (credit)
- The unearned interest income balance is reduced by the recognized interest income.
By following these steps, you can determine if your answers match.