Question

Splish Brothers Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Sunland Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Sunland has the option to purchase the equipment for $24,000 upon termination of the lease. It is not reasonably certain that Sunland will exercise this option.
2.		The equipment has a cost of $280,000 and fair value of $330,500 to Splish Brothers Leasing. The useful economic life is 2 years, with a residual value of $24,000.
3.		Splish Brothers Leasing desires to earn a return of 5% on its investment.
4.		Collectibility of the payments by Splish Brothers Leasing is probable.

Prepare the journal entries on the books of Splish Brothers Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (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
1/1/2012/31/2012/31/21	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

Assuming that Sunland exercises its option to purchase the equipment on December 31, 2021, prepare the journal entry to record the sale on Splish Brothers Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
12/31/21	enter an account title for the journal entry on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2021

Answer 1

REQUIRED 1 :
Date	General journal	Debit	Credit
Jan 1,2020	Lease receivable (see note 2)	$ 330,500
	Cost of goods sold ( see note 2 )	$ 258,231
	Sales (see note 2 )		$ 308,731
	Inventory (given )		$ 280,000
	( to record lease )
Dec 31,2020	Cash ( see note 1)	$ 166,037
	Lease receivable ( see note 2 )		$ 149,512
	Interest revenue (see note 2 )		$ 16,525
	(to record interest revenue for Dec 2020)
Dec 31,2021	Cash ( see note 1)	$ 166,037
	Lease receivable ( see note 2 )		$ 156,988
	Interest revenue (see note 2 )		$ 9,049
	(to record interest revenue for Dec 2021)
REQUIRED 2 :
Date	General journal	Debit	Credit
Dec 31,2021	Cash	$ 24,000
	Sales revenue		$ 24,000
	( to record sale on Splish Brothers leasing's books )

Note 1
Computation of annual payments :
Fair value of Equipment	$ 330,500
less: Present value of residual value	($ 21,768.72)
($24,000 * 0.90703 )
Amount to be recovered through lease payments	$ 308,731 (Rounded)
Two periodic lease payments ($ 308,731 /1.85941)	$ 166,037 (Rounded)
Present value of $ 1 at 5 % 2 periods is 0.90703
Present value of an ordinary annuity of $ 1 at 5 % 2 periods is 1.85941
Splish Brother will be classify the lease as a sales type lease because of the
agreement meets both present value test ($ 308,731 /$ 330,500)=93.41%%)
which is greater than 90 % . And lease term test (2/2 = 100 % ) which
is greater than 75 % . The $ 24,000 option to purchase does not count as
bargain purchase . Hence expected residual value at the end of the
lease term is $ 24,000

Note 2:
SPLISH BROTHERS LEASING COMPANY (lessor)
Amortization schedule
Date	Annual payments	Interest	Recovery of lease receivable	Lease Receivable
Jan 1,2020				$ 330,500
Dec 31,2020	$ 166,037	$ 16,525   {$330,500*5%}	$ 149,512            {166,037 -16,525}	$180,988 {330,500 -149,512}
Dec 31,2021	$ 166,037	$ 9,049 {$180,988*5%}	$ 156,988         {166,037-9,049}	$24,000 {180,988-156,988}
Dec 31,2021	$ 24,000	$ 0	$ 24,000	$ 0
Lease receivable = ($166,037*1.85941)+($24,000*0.90703)= $ 330,500
Cost of goods sold ={ $ 280,000 - ($24,000 *0.90703)}= $ 258,231 ( Rounded )
Sales revenue = {$ 330,500 - ($24,000 *0.90703 ) }= $ 308,731 (Rounded)