Moonstruck Company manufactures a reservation system with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $278,072, and its unguaranteed residual value at the end of the lease term is estimated to be $20,000. National will pay annual payments of $40,000 at the beginning of each year and all maintenance, insurance, and taxes. Moon struck incurred costs of $180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. Moonstruck has determined that the implicit interest rate is 10%.

Instructions

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

(1) Lease receivable.

(2) Sales price.

(3) Cost of sales.

(b) Prepare a 10-year lease amortization schedule.

(c) Prepare all of the lessor’s journal entries for the first year.