Reference no: EM133188306

Question - Berne Company (lessor) enters into a lease with Fox Company to lease equipment to Fox beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $50,000 to be made at the end of each year.

2. The equipment costs $130,000. The equipment has an estimated life of 4 years and an estimated residual value at the end of the lease term of zero.

3. Fox agrees to pay all executory costs.

4. The interest rate implicit in the lease is 12%.

5. The initial direct costs are insignificant and assumed to be zero.

6. 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.

Required -

1. Determine if the lease is a sales-type or direct financing lease from Berne's point of view (calculate the selling price and assume that this is also the fair value).

2. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor.

3. Prepare journal entries for Berne, the lessor, for the years 2016 and 2017.