Question

Sunland Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $88,500. 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. Sunland 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.

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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.)

Date		Rent Receipt/ Payment		Interest Revenue/ Expense		Reduction of Principal		Receivable/ Liability
1/1/20		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places
12/31/20		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
12/31/21		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
12/31/22		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places

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

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.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount

Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Sunland’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $7,500. (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.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount

Answer 1

Solution:

Calculation of lease payments =

Fair Value of the asset	$ 88500
Lease Payments at the beginning of each of the next three years @ 8% ordinary annuity (68000÷ 2.57710)	$ 34341

Lease Amortisation Schedule
Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
01-01-2020				88500.00
31-12-2020	34341	7080	27261	61239
31-12-2021	34341	4899	29442	31797
31-12-2022	34341	2544	31797	0

Journal Entries - IN the Books of SunLand Leasing - Sales Type Lease
01-Jan-20	Lease Receivable	88500
	Cost of Goods Sold	65000
	Sales Revenue		88500
	Inventory of Machine		65000

	Journal Entries - In the Books of Sharrer
Jan 01 2020	Right to use Asset	88500.00
	Lease Liability		88500.00
	(To record Liability)

(1) Sharrer does not know Sunland’s implicit rate (Sharrer’s incremental borrowing rate is 9%

Lease Liability
PV of Lease Payments
Lease Payment	34341
No of years	3
Interest rate	9%
PV annuity due Factor @ 9% for 3 years	2.75911
PV of Lease Payments	94751

Journal entry at commencement of the lease for Sharrer

	Journal Entries - In the Books of Sharrer
Jan 01 2020	Right to use Asset	94751
	Lease Liability		94751
	(To record Liability)

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