Question

Sandhill Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2020. The lease is for an 8-year period and requires equal annual payments of $30,232 at the beginning of each year. The first payment is received on January 1, 2020. Sandhill had purchased the machine during 2016 for $105,000. Collectibility of lease payments by Sandhill is probable. Sandhill set the annual rental to ensure a 6% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Sandhill at the termination of the lease.

Compute the amount of the lease receivable. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places e.g. 5,275.)

Amount of the lease receivable

$enter a dollar amount of the lease receivable rounded to 0 decimal places

Prepare all necessary journal entries for Sandhill for 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

Suppose the collectibility of the lease payments was not probable for Sandhill. Prepare the necessary journal entry for the company in 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Suppose at the end of the lease term, Sandhill receives the asset and determines that it actually has a fair value of $1,190 instead of the anticipated residual value of $0. Record the entry to recognize the receipt of the asset for Sandhill at the end of the lease term. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

Answer 1

Answer :-

The amount of the lease receivable are as follows:-

In the question it was given that The lease is for an 8-year period and requires equal annual payments of $30,232 at the beginning of each year. So there is 8 installment of annual payment.And Sandhill set the annual rental to ensure a 6% rate of return . Therefore,PV factor = 6% rate of return.

Therefore,

Amount of lease receivable = $198,999.

Necessary journal entries for Sandhill for 2020 are as follows :-

Date	Account Titles and Explanation	Debit	Credit
1/1/20	Lease receivable A/c Dr.	$198,999
	Cost of goods sold A/c Dr.	$105,000
	To Sales A/c		$198,999
	To Inventory A/c		$105,000
	(To record the lease)
	Cash A/c Dr.	$30,232
	To Lease receivable A/c		$30,232
	(To record the first lease payment)
12/31/20	Interest receivable A/c Dr.	$10,126
	To Interest revenue A/c [($198,999 - $30,232) × 6% rate]		$10,126
	(To record interest receivable for 2020)

The collectibility of the lease payments was not probable for Sandhill. Prepare the necessary journal entry for the company in 2020 -

1/1/2020	Cash A/c Dr.	$30,232
	To Deposit Liability A/c		$30,232
	( To record the collectibility of the lease payments was not probable )

Suppose at the end of the lease term, Sandhill receives the asset and determines that it actually has a fair value of $1,190 instead of the anticipated residual value of $0. Record the entry to recognize the receipt of the asset for Sandhill at the end of the lease term

1/1/2020	Inventory A/c Dr.	$1,190
	To Gain on Lease A/c		$1,1900