ABC Co. specializes in leasing large storage units to other businesses. ABC entered a contract to lease a storage unit to Smith, Inc. for 4 years when that particular storage unit had a remaining useful life of 5 years. The fair value of the unit was $16,000 at the commencement of the lease on January 1, 2017. The present value of the five equal rental payments of $4,204 at the start of each year, plus the present value of a guaranteed residual value of $1,000, equals the fair value of $16,000, ABC's implicit rate of return on the lease of 7%. The following is a correct, complete amortization schedule created by ABC.
Date Lease Payment Interest (7%) on Reduction of Balance of
- Outstanding Lease Receivable Lease Receivable Lease Receivable
1/1/17 $16,000
1/1/17 $4,204 $4,204 11,796
1/1/18 4,204 $826 3,378 8,418
1/1/19 4,204 589 3,615 4,803
1/1/20 4,204 336 3,868 935
12/31/20 1,000 65 935 0
$17,816 $1,816 $16,000
Required:
1. Given the above schedule, make the appropriate entries at December 31, 2020, to record the accrual of interest and the return of the storage unit to Pharoah (assuming the unit is returned on December 31, 2020, at the expected and guaranteed residual value of $1,000).