Question

On December 31, 2019, Sunland Company leased machinery from Terminator Corporation for an agreed upon lease term of 3 years. Sunland agreed to make annual lease payments of $15,000, beginning on December 31, 2019. The expected residual value of the machinery at the end of the lease term is $7,500. Sunland guarantees a residual value of $7,500 at the end of the lease term, which equals the expected residual value of the machinery.

What amount will Sunland record as its lease liability if the expected residual value at the end of the lease term is $4,500 and Sunland guarantees a residual of $7,500. Its incremental borrowing rate is 10% and the implicit rate of the lease is unknown?

Answer 1

a) Lessee Accounting: Sunland Company
The leasee should use a single accounting model for all type of lease. Therefore, the leasee shall record the lease liability & right in use asset in the at the present value of the lease payment & expected residual value or guaranteed residual value(lower).
Therefore the leasee shall record the lease liability & right in use asset (Present value of Lease payment and expected the residual value of $4500.
Date	Payments (Cash flows)	Present Value Factor @10%p.a.	Discounted Cash flows/ Present value
31-12-19	$                               15,000.00	1	$                     15,000
31-12-20	$                               15,000.00	0.90909	$                     13,636
31-12-21	$                               15,000.00	0.82645	$                     12,397
31-12-22	$                                 4,500.00	0.75131	$                       3,381
Total	$                                     49,500		44,414
Therefoere Lease liablity & ROU asset will be recognised at $44,414
	In the books of Leasee
	Journal Entries
Year	Particulars	Debit	Credit
31-12-19	Right of Use Asset	$                    44,414
	Lease liabilty		$                     44,414
	(To initially recognise the lease-related asset and liability .)
31-12-19	Lease liabilty	$                    15,000
	Cash		$                     15,000
	(To record lease payment)
31-12-20	Interest expense	$                       2,941
	Lease liabilty		$                       2,941
	(To record interest expense )
	($44,414-$15,000)*10%
31-12-20	Amortisation expense	$                    14,805
	Right of Use Asset A/C		$                     14,805
	(To record depreciation expense on the ROU asset)
	($44,414/3 year)
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