Question

Exercise 21A-5 a-c

Sage Hill Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2.		The cost of the asset to the lessor is $401,000. The fair value of the asset at January 1, 2017, is $401,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $22,050, none of which is guaranteed.
4.		The agreement requires equal annual rental payments, beginning on January 1, 2017.
5.		Collectibility of the lease payments by Sage Hill is probable.

a. Assuming the lessor desires a 8% rate of return on its investment, calculate the amount of the annual rental payment required.

b. Prepare an amortization schedule that is suitable for the lessor for the lease term.

c. Prepare all of the journal entries for the lessor for 2017 and 2018 to record the lease agreement, the receipt of lease payments, and the recognition of revenue. Assume the lessor’s annual accounting period ends on December 31, and it does not use reversing entries.

Answer 1

Year	Present Value Factor @8%	Deprciation	Present Value of Depreciation		Journal Entries in the books of Lessor
0	1.0000	$          63,158	$                                              63,158
1	0.9259	$          63,158	$                                              58,480		at the beginning of the Lease
2	0.8573	$          63,158	$                                              54,148		Lease Receivable	Dr	$ 378,950
3	0.7938	$          63,158	$                                              50,137		Equipment Account	Cr		$ 378,950
4	0.7350	$          63,158	$                                              46,423
5	0.6806	$          63,158	$                                              42,985		at the time of payment of lease rent
	4.9927	$        378,950	$                                            315,331		Lease receivable	Dr	$    75,901
					Finance Income	Cr		$    75,901
	Fair Value	$        401,000			Amortization of Equipment
	Residual Value	$          22,050		year 0	Amortization of Equipment Account	Dr	$    63,158
		$        378,950			Equipment Account	Cr		$    63,158
	Divide it by	4.9927
	Required Annual rental Payment	$          75,901		year 1	Amortization of Equipment Account	Dr	$    58,480
					Equipment Account	Cr		$    58,480
	Amortization Schedule	$        378,950		year 2	Amortization of Equipment Account	Dr	$    54,148
	Divided by 6 Years	$    63,158.33			Equipment Account	Cr		$    54,148
				year 3	Amortization of Equipment Account	Dr	$    50,137
					Equipment Account	Cr		$    50,137
				year 4	Amortization of Equipment Account	Dr	$    46,423
					Equipment Account	Cr		$    46,423
				year 5	Amortization of Equipment Account	Dr	$    42,985
					Equipment Account	Cr		$    42,985