Question

Sunland Incorporated leases a piece of machinery to Culver Company on January 1, 2020, under the following terms.

1.		The lease is to be for 4 years with rental payments of $12,488 to be made at the beginning of each year.
2.		The machinery’ has a fair value of $66,146, a book value of $49,360, and an economic life of 10 years.
3.		At the end of the lease term, both parties expect the machinery to have a residual value of $24,680. To protect against a large loss, Sunland requests Culver to guarantee $17,260 of the residual value, which Irving agrees to do.
4.		The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature.
5.		The implicit rate is 5%, which is known by Culver.
6.		Collectibility of the payments is probable.

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Evaluate the criteria for classification of the lease, and describe the nature of the lease.

For the lessee, it is a _________________ , and for the lessor, it is a ___________________.   

Prepare the journal entries for Culver for the year 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To records first lease payment)
Dec. 31
	(To record accrued interest)
Dec. 31
	(To record amortization expense)

Prepare the journal entries for Sunland for the year 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To record first lease payment)
Dec. 31
	(To record lease revenue)

Evaluate the criteria for classification of the lease, and describe the nature of the lease, assuming that Culver did not guarantee any amount of the expected residual value.

For the lessee, it is a __________________ , and for the lessor, it is a _____________________.

Suppose Culver did not guarantee any amount of the expected residual value. Prepare the journal entries for Culver for the year 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To record first lease payment)
Dec. 31
	(To record interest and amortization)

Suppose Culver did not guarantee any amount of the expected residual value. Prepare the journal entries for Sunland for the year 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease payments)
Dec. 31
	(To record lease revenue)
Dec. 31
	(To record depreciation)

Answer 1

For lessee it is an operating risk.

depreciation interest shall be calculated on book value = 49360*0.05= 2468

Amortisation expense= (49360-17260)/10= 3210 (This is done because the asset shall be used for 10 years post which the min value of the asset will be 17260.

Date	Particulars	Debit	Credit
Jan1	No entry
Jan 1	Lease Rent	12488
Dec 31	Depreciation Interest	2468
Dec 31	Amortization Expense	3210
Jan 1	Cash		12488
Dec 31	Cash		2468
Dec 31	Cash		3210

Date	Particulars	Debit	Credit
Jan1	Machinery	49360
	Culver		49360
Jan 1	Cash	12488
	Culver		12488
Dec 31	No entry

Date	Particulars	Debit	Credit
Jan1	No entry
Jan 1	Lease Rent	12488
Dec 31	Depreciation Interest	2468
Dec 31	Amortization Expense	2468
Jan 1	Cash		12488
Dec 31	Cash		2468
Dec 31	Cash		2468

Amortisation expense= (49360-24680)/10= 2468 (This is done because the asset shall be used for 10 years post which the min value of the asset will be 17260.

Date	Particulars	Debit	Credit
Jan1	No entry
Jan 1	Lease Rent	12488
Dec 31	Depreciation Interest	2468
Dec 31	Amortization Expense	4936
Jan 1	Cash		12488
Dec 31	Cash		2468
Dec 31	Cash		4936

Amortisation expense= 49360/10= 4936(This is done because the asset shall be used for 10 years post which the min value of the asset will be 17260.