Question

Technoid Inc. sells computer systems. Technoid leases computers to lone Star Company on January 1, 2013. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: Lease payments: $2, 466, 754 semiannually; first payment at January 1, 2013; remaining payments at June 30 and December 31 each year through June 30, 2017. Lease term: five years (10 semiannual payments). No residual value; no bargain purchase option. Economic life of equipment: five years. Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. Fair value of the computers at January 1, 2013: $20 million. Collectability of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Prepare the appropriate journal entries for both the lessor and lessee for calendar year 2013.