Question

In: Accounting

Sanders Leasing Company signs an agreement on January 1, 2020, to lease equipment to El Paso...

Sanders Leasing Company signs an agreement on January 1, 2020, to lease equipment to El Paso Company. The following information relates to this agreement:


The term of the non-cancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.


The cost of the asset to the lessor is $320,000. The fair value of the asset at January 1, 2020, is $320,000.


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 $34,000, none of which is guaranteed.


The agreement requires equal annual rental payments, beginning on January 1, 2020.


Collectibility of the lease payments by Sanders is probable.


Instructions


(Round all numbers to the nearest dollar.)


(a) Assuming the lessor desires an 8% rate of return on its investment, calculate the amount of the annual rental payment required. (Round to the nearest dollar.)


(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 2020 and 2021 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.


can you please solve this question as soon as possible. Thank you

Solutions

Expert Solution

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Part 1
PV $                                                                                           -320,000 Fair Value B5
I 8% Rate B6
N                                                                                                              5 Period B7
PMT ? B8
FV $                                                                                               34,000 Non Guranteed Residual Value B9
Type                                                                                                              1 Type B10
Periodic Lease Payment $                                                                                               68,843 PMT(B6,B7,B5,B9,B10)
Part 2
Date Annual Lease Payment Interest 8% Net Recovery Balance
1/1/2020 $   320,000
1/1/2020 $                                                                                               68,843 $                68,843 $   251,157
1/1/2021 $                                                                                               68,843 $                                                           20,093 $                48,751 $   202,406
1/1/2022 $                                                                                               68,843 $                                                           16,193 $                52,651 $   149,756
1/1/2023 $                                                                                               68,843 $                                                           11,980 $                56,863 $     92,893
1/1/2024 $                                                                                               68,843 $                                                              7,431 $                61,412 $     31,481
31/12/2024 $                                                                                               34,000 $                                                              2,519 $                31,481 $                0
Total $                                                                                            378,215 $                                                           58,215 $             320,000
Part 3
Date Account Debit Credit
1/1/20 Lease Receivable $                                                         320,000
Cost of goods sold [$320,000-($34,000*0.68058)] $                                                         296,860
     Sales Revenue $             296,860
     Inventory $             320,000
1/1/20 Cash $                                                           68,843
     Lease Receivable $                68,843
1/1/21 Lease Receivable $                                                           20,093
     Interest Income $                20,093
1/1/22 Cash $                                                           68,843
     Lease Receivable $                68,843
31/10/21 Lease Receivable $                                                           16,193
     Interest Income $                16,193

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