Exercise 21A-6 a-b Teal Mountain Leasing Company signs a lease agreement on Janu

Question

Exercise 21A-6 a-b

Teal Mountain Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Sandhill Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

4. Collectibility of the payments by Teal Mountain Leasing is probable.

Prepare the journal entries on the books of Teal Mountain Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Assuming that Sandhill exercises its option to purchase the equipment on December 31, 2018, prepare the journal entry to record the sale on Teal Mountain Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

1. Sandhill has the option to purchase the equipment for $25,000 upon termination of the lease. It is not reasonably certain that Sandhill will exercise this option. 2. The equipment has a cost of $300,000 and fair value of $349,000 to Teal Mountain Leasing. The useful economic life is 2 years, with a residual value of $25,000. 3. Teal Mountain Leasing desires to earn a return of 5% on its investment.

4. Collectibility of the payments by Teal Mountain Leasing is probable.

Prepare the journal entries on the books of Teal Mountain Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Assuming that Sandhill exercises its option to purchase the equipment on December 31, 2018, prepare the journal entry to record the sale on Teal Mountain Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Explanation / Answer

In this lease Contract firstly we have to,

Calculating annual lease payment

Cost (Fair value) to lessor

$349,000

Less: PV of Salvage value

(25,000*0.9070(w1))

$22,675

Amount to be recovered through lease payments

(349000-22675)

$326,325

Two Periodic Lease payments:

(326,325/2)

163,162.5

W1) Discount factor

Salvage value PV @5% after 2year= = 0.9070

Prepare amortization Table to find Interest

year

Opening

Effective Interest @5%

Accrued Repayments

Recovery Of Lease Receivable(4-3)

Closing

(2-5)

2017

349,000

(349000*5%)=17,450

163,162.5(table1)

(163162.5-17450)=145,712.5

(349000-145712.5)=203,287.5

2018

203,287.5

(203287.5*0.05=10,164

163,162.5

152998.5

50,288.5

Journal Entries in Accounts of lessor will be

Debit

Credit

1/1/2017

Lease Receivable

349,000

Equipments

349,000

31/12/2017

Cash

163,162.5(annual repay)

Lease Receivable(recovered)

Table 2

145,712.5

Interest Receivable

17,450

31/12/2018

Cash

163,162.5

Lease Receivable

152,998.5

Interest Receivable

10,164

b) If option to purchase exercise

Cash

25,000

Lease Receivable

25,000

Loss Recognised (profit and loss)

(50288.5(table2)-25,000)

27,288.5

Cost (Fair value) to lessor

$349,000

Less: PV of Salvage value

(25,000*0.9070(w1))

$22,675

Amount to be recovered through lease payments

(349000-22675)

$326,325

Two Periodic Lease payments:

(326,325/2)

163,162.5

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