The Lamplighter Company, the lessor, agrees to lease equipment to Tilson Company, the lessee, beginning January 1, 2007. The lease terms, provisions, and related events are as follows:
The lease is non-cancelable and has a term of eight years. The annual rentals are $32,000, payable at the end of each year. The Tilson Company agrees to pay all executory costs. The interest rate implicit in the lease is 14%. The cost of the equipment to the lessor is $110,000. The lessor incurs no material initial direct costs. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. The lessor estimates that the fair value at the end of the lease term will be $20,000 and that the economic life of the equipment is nine years.
1. Calculate the selling price implied by the lease and prepare a table summarizing the lease receipts and interest revenue earned by the lessor for this sales-type lease.
2. State why this is a sales-type lease.
3. Prepare journal entries for Lamplighter Company for the years 2007, 2008, and 2010.
4. Prepare partial balance sheets for Lamplighter Company for December 31, 2007 and December 31, 2008, showing how the accounts should be disclosed.
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