Yellow Company, a dealer in machinery and equipment, leased equipment to Viola, Inc., on January 1, 2018 under 10 year lease beginning immediately.

• The useful life of the asset is ten years.
• The equipment must be returned to Yellow Company at the end of the lease.
• The unguaranteed residual value is $400,000.
• The first of 10 equal annual payments of $840,000 was made on January 1, 2018.
• Yellow purchased the equipment wholesale for $5,300,000 on December 31, 2017.
• On January 1, 2018, the current retail price of the equipment is $7,200,000.
• Assume the appropriate discount rate for both parties is 8%.

The present value of $1 for 10 years at 8% is 0.46319.

The present value of an annuity due of $1 for 10 years at 8% is 7.24689.

Prepare the journal entries for 2018 (the first year of the lease) for Yellow (the lessor). This includes the lease signing, receipt of first payment, and accrual of interest receivable at December 31.

Answer rating: 100% (QA)

As per IFRS 16 when lease term covers major or whole useful life then such lea... View the full answer