Question

Sandhill Corp. is a manufacturer of truck trailers. On January 1, 2021, Sandhill Corp. leases 9 trailers to Whispering Company under a 5-year noncancelable lease agreement. The following information about the lease and the trailers is provided:

1.		Equal annual payments that are due on January 1 each year provide Sandhill Corp. with a 12% return on net investment.
2.		Titles to the trailers pass to Whispering at the end of the lease.
3.		The fair value of each trailer is $50,500. The cost of each trailer to Sandhill Corp. is $45,100. Each trailer has an expected useful life of nine years.
4.		Collectibility of the lease payments is probable. Prepare a lease amortization schedule for Sandhill Corp. for the first three years. (Round answers to 0 decimal places e.g. 5,275.) Sandhill Corp. Lease Amortization Schedule (Lessor) Date Annual Lease Rental Interest on Lease Receivable Lease Receivable Recovery Lease Receivable 1/1/21 $ 1/1/21 $ $ $ 1/1/22 1/1/23 Prepare the journal entries for the lessor for 2021 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit January 1, 2021December 31, 2021 (To record the lease) January 1, 2021December 31, 2021 (To record receipt of the first lease payments) January 1, 2021December 31, 2021

Answer 1

a	Calculation of annual lease rental		Amount $
	Fair value of Truck	($50,500*9 truck)	$                  454,500
	Add: Initial direct cost		$                              -
		a	$                  454,500
	Less: Present value of guaranteed residual value
	Less: Present value of unguaranteed residual value		$                              -
		b	$                  454,500
	Annuity factor for implicit rate	c	4.03735	(12% annuity factor)
	Annual Lease rent	d=b/c	$                  112,574
	Year	Payments (Cash flows)	Present Value Factor @12%p.a.	Discounted Cash flows/ Present value
	1	$                                                        112,574	1	$                             112,574
	2	$                                                        112,574	0.89286	$                             100,512
	3	$                                                        112,574	0.79719	$                               89,743
	4	$                                                        112,574	0.71178	$                               80,128
	5	$                                                        112,574	0.63552	$                               71,543
	Total	$                                                        562,869		$                             454,500
	Lease Amortisation Schedule:
Beg of year	Annual Lease Payments Plus expected residual value	Interest on lease receivable	Recovery of lease receivable	Lease receivable
01-01-21	$                                       -	$                                                                    -	$                              -	$                             454,500
01-01-21	$                           112,574	$                                                                    -	$                  112,574	$                             341,926
01-01-22	$                           112,574	$                                                          41,031	$                     71,543	$                             270,383
01-01-23	$                           112,574	$                                                          32,446	$                     80,128	$                             190,256
01-01-24	$                           112,574	$                                                          22,831	$                     89,743	$                             100,512
01-01-25	$                           112,574	$                                                          12,061	$                  100,512	$                                         -
	Note: As the lease payment is made at the beginning of the year, interest will be calculated on Opening lease liability less lease payment .
a		In the books of Lessor- Sandhil Corp
		Journal Entries for Sale type lease
	Date	Particulars	Debit	Credit
	01-01-21	Lease Receivable	$                  454,500
		Cost of Sales less PV of unguaranteed residual value		$                             405,900
		Gain on sale of Equipment		$                               48,600
		(To record asset given on lease under sale type lease )
		(Cost of truck= 45100*9=405900)
	01-01-21	Cash	$                  112,574
		Lease Receivable		$                             112,574
		(To record 1st lease payment received)
	31-12-21	Lease Receivable	$                     41,031
		Interest income		$                               41,031
		(To record Interest income on lease receivable)
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