Question

Crane Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $96,500. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Crane expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020.

a) Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (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.)

b) Prepare the journal entry at commencement of the lease for Crane. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

c) Prepare the journal entry at commencement of the lease for Sharrer. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

d) Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Crane’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $8,000. (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.)

Answer 1

Sollution 1
Amortization schedule
Date	Rent Receipt / Payment	Interest Revenue /Expenses	Reduction Of Principle	Receivable / Liability
01.01.2020				$96,500.00
31.12.2020	$37,445.00	$7,720.00	$29,725.00	$66,775.00
31.12.2021	$37,445.00	$5,342.00	$32,103.00	$34,672.00
31.12.2022	$37,445.00	$2,773.76	$34,671.24	$0.76
		15835.76
Working
Fair value of assets	96500
P.V. for 3 years	2.58	(0.92593+0.85734+0.79383)
Annual Payment	37445.1903	(96500/2.5771)

Sollution 2
journal entry at commencement of the lease for Crane
Date	Account Titles	Debit	Credit
1/1/2020	Lease receivable	$112,335.76
	Leased Asets(Machine)		$96,500.00
	Unearned Lease Revenue		$15,835.76
	(To Record Lease at Commencement )
Sollution 3
journal entry at commencement of the lease for Sharrer
Date	Account Titles	Debit	Credit
1/1/2020	Lease Machine	$112,335.76
	Leased Liability		$112,335.76
	(To Record Lease )
Sollution 4
journal entry at commencement of the lease for Sharrer after considering @9% Borrowing Rate
Date	Account Titles	Debit	Credit
1/1/2020	Lease Machine	$114,368.29
	Leased Liability		$114,368.29
	(To Record Lease )
1/1/2020	Initial Direct Cost	$8,000.00
	cash		$8,000.00
	(To Record Initial Direct Cost )
Working
Amortization schedule
Date	Rent Receipt / Payment	Interest Revenue /Expenses	Reduction Of Principle	Receivable / Liability
01.01.2020				$96,500.00
31.12.2020	$38,123.00	$8,685.00	$29,438.00	$67,062.00
31.12.2021	$38,123.00	$6,035.58	$32,087.42	$34,974.58
31.12.2022	$38,123.00	$3,147.71	$34,975.29	-$0.71
Total		$17,868.29
Working
Fair value of assets	96500
P.V. for 3 years	2.53	(0.917431+0.84168+0.772183)
Annual Payment	38122.7841	(96500/2.5771)