Question

Teal Mountain Corporation leases a building to Sandhill, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1.		The lease term is 10 years with equal annual rental payments of $3,824 at the end of each year.
2.		Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3.		The building has a fair value of $34,900, a book value to Teal Mountain of $22,800, and a useful life of 15 years.
4.		At the end of the lease term, Teal Mountain and Sandhill expect the residual value of the building to be $12,100, and this amount is guaranteed by Money, Inc., a third party.
5.		Teal Mountain wants to earn a 6% return on the lease, and collectibility of the payments is probable.

Click here to view factor tables.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

(a)

(a)

Correct answer iconYour answer is correct.

Determine the nature of this lease to both Teal Mountain and Sandhill.

The lease is a/an operating leasefinancing lease operating leasefinancing lease to Teal Mountain.

The lease is a/an operating leasefinancing lease operating leasefinancing lease to Sandhill.

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List of Accounts

Attempts: 2 of 3 used

(b)

(b)

Assume the present value of lease payments and third-party guarantee is $34,900 and the rate of return to amortize the net lease receivable to zero is 14.39%. Prepare the amortization schedules Teal Mountain would use to amortize the net lease receivable to zero. (Round answers to 0 decimal places, e.g. 5,275.)

TEAL MOUNTAIN CORPORATION (Lessor) Lease Amortization Schedule Sales-Type Lease
Date		Annual Lease Payment		Interest on Lease Receivable		Recovery of Lease Receivable		Lease Receivable
1/1/20		$		$		$		$
12/31/20
12/31/21
12/31/22
12/31/23
12/31/24
12/31/25
12/31/26
12/31/27
12/31/28
12/31/29				*
12/31/30
		$		$		$

*Rounded $3

TEAL MOUNTAIN CORPORATION (Lessor) Lease Amortization Schedule Direct Financing Lease
Date		Annual Lease Payment		Interest on Lease Receivable		Recovery of Lease Receivable		Lease Receivable
1/1/20		$		$		$		$
12/31/20
12/31/21
12/31/22
12/31/23
12/31/24
12/31/25
12/31/26
12/31/27
12/31/28
12/31/29				*
12/31/29
		$		$		$

*Rounded $

Interest Tables and Their Contents

1.   Future Value of 1 Table. Contains the amounts to which 1 will accumulate if deposited now at a specified rate and left for a specified number of periods (Table 6.1).

TABLE 6.1 Future Value of 1 (Future Value of a Single Sum)

FVFn,i=(1+i)n
(n) Periods	2%	2½%	3%	4%	5%	6%
1	1.02000	1.02500	1.03000	1.04000	1.05000	1.06000
2	1.04040	1.05063	1.06090	1.08160	1.10250	1.12360
3	1.06121	1.07689	1.09273	1.12486	1.15763	1.19102
4	1.08243	1.10381	1.12551	1.16986	1.21551	1.26248
5	1.10408	1.13141	1.15927	1.21665	1.27628	1.33823
6	1.12616	1.15969	1.19405	1.26532	1.34010	1.41852
7	1.14869	1.18869	1.22987	1.31593	1.40710	1.50363
8	1.17166	1.21840	1.26677	1.36857	1.47746	1.59385
9	1.19509	1.24886	1.30477	1.42331	1.55133	1.68948
10	1.21899	1.28008	1.34392	1.48024	1.62889	1.79085
11	1.24337	1.31209	1.38423	1.53945	1.71034	1.89830
12	1.26824	1.34489	1.42576	1.60103	1.79586	2.01220
13	1.29361	1.37851	1.46853	1.66507	1.88565	2.13293
14	1.31948	1.41297	1.51259	1.73168	1.97993	2.26090
15	1.34587	1.44830	1.55797	1.80094	2.07893	2.39656

Answer 1