Question

Blossom Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $90,500. 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. Blossom 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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Part 1

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

eTextbook and Media

List of Accounts

Part 2

Prepare the journal entry at commencement of the lease for Blossom. (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
	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. (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

eTextbook and Media

List of Accounts

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

	Step: 1	Identification of the type of the lease:
		Since useful life of the machinery is equal to the lease term. It is a finance lease
		Further, the fair value of the machinery is more than cost of the machinery, Hence it classified as Sale type lease.
	Note:	The discount rate that is used to discount the lease payments are generally implicit rate of lease for the lessor and lessee.
		In case when implicit rate of the lessor is not known to the leasee, leasee may use incremental borrowing rate.
	Step: 2	Computation of Yearly lease Amount
		Period	Table values PV @ 8%
		1	0.92593
		2	0.85734
		3	0.79383
			2.57710
		Lease rent	$35,117	(90500/2.5771)
Part -1	Step: 3	Preparation of Amortization Table
		Date	Rent receipt/Payment	Interest revenue/expense		Reduction of Principal		Receivable/Liability
		01/01/2020	0	$0		$0		$90,500
		12/31/2020	$35,117	$7,240	(90,500*8%)	$27,877	(35,117-7,240)	$62,623	(90,500-27,877)
		12/31/2021	$35,117	$5,010	(62,623*8%)	$30,107	(35,117-5,010)	$32,516	(62,623-30,107)
		12/31/2022	$35,117	$2,601	(32,516*8%)	$32,516	(35,117-2,601)	$0	(32,516-32,516)
	Step : 4	Preparing Journal Entries in books
		In the Books of Blossom
		Date	Account titles and Explanation	Debit	Credit
		01/01/2020	Lease receivable	$90,500
			Cost of goods sold	$65,000
			Sales		$90,500
			Inventory		$65,000
			(lease commenced)
		In the Books of Sharrer
		Date	Account titles and Explanation	Debit	Credit
		01/01/2020	ROU asset	$90,500
			Lease liability		$90,500
			(ROU asset recognised)
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