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Blue Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment...

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Accounting

Blue Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Kingbird Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1. Kingbird Company has the option to purchase the equipment for $14,600 upon termination of the lease.
2. The equipment has a cost and fair value of $158,000 to Blue Leasing Company. The useful economic life is 2 years, with a salvage value of $14,600.
3. Kingbird Company is required to pay $4,900 each year to the lessor for executory costs.
4. Blue Leasing Company desires to earn a return of 10% on its investment.
5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

(a) Prepare the journal entries on the books of Blue Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.

(b) Assuming that Kingbird Company exercises its option to purchase the equipment on December 31, 2018, prepare the journal entry to reflect the sale on Blues books.

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