Exercise 21A-6a-b Splish Brothers Leasing Company signs a lease agreement on Jan

Question

Exercise 21A-6a-b Splish Brothers Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Sunland 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 1. Sunland has the option to purchase the equipment for $24,000 upon termination of the lease. It is not reasonably certain that Sunland will exercise this option. 2. The equipment has a cost of $280,000 and fair value of $330,500 to Splish Brothers Leasing. The useful economic Ife is 2 years, with a residual value of $24,000. 3. Spish Brothers Leasing desires to earn a return of 5% on its investment. 4. Collectibility of the payments by Splish Brothers Leasing is probable. Prepare the journal entries on the books of Splish Brothers Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018.(Credit accouns 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 provides and round final answers to O decimal places, e.g. $,275.) Date Account Titles and Explanation Debit Credit Lease Receivable 330500 Cost of Goods Sold 58231 Sales Revenue 0873 Inventory 280000 12/31/17 Cash

Explanation / Answer

PV of lease payments= Fair value of the equipment= 330500 PV of residual value 21769 So,amt.to be recovered thro' 2 end-of-yr. lease payments 308731 So, the annual payments is found out Using the PV of ordinary annuity formula as under: 308731=Pmt.*(1-1.05^-2)/0.05 Pmt.=308731/((1-1.05^-2)/0.05) 166037 Lease Receivable amortisation schedule: Year Annuity Tow. Int. at 5% Tow. Lease Lease balance 0 330500 1 166037 16525 149512 180988 2 166037 9049 156988 24000 (Residual value) If purchased 24000 0 Journal entries Date Account title Debit Credit 1/1/2017 Lease Receivable(Fair Value) 330500 COGS(280000-21769) 258231 Sales Revenue(330500-21769) 308731 Equipment(Cost) 280000 (Inception of lease) 12/31/2017 Cash 166037 Lease Receivable 149512 Interest income 16525 (1st instalment recd.)(as per table) 12/31/2018 Cash 166037 Lease Receivable 156988 Interest income 9049 ( 2nd & Last instalment recd.)(as per table) If Sunland exercises the option to purchase: 12/31/2018 Cash 24000 Lease Receivable 24000

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