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 $14,999 to be made at the beginning of each year.
2.		The machinery’ has a fair value of $78,692, a book value of $58,720, 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 $29,360. To protect against a large loss, Sunland requests Culver to guarantee $20,770 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.

Part 1) Evaluate the criteria for classification of the lease, and describe the nature of the lease.

For the lessee, it is a _________ (operating lease, sales-type lease, finance lease)  , and for the lessor, it is a __________( operating lease, sales-type lease, finance lease)

Part 2) 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)

Part 3) 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 _________ (operating lease, sales-type lease, finance lease)  , and for the lessor, it is a __________( operating lease, sales-type lease, finance lease)

Part 4)

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

A. Classification of the lease, and describe the nature of the lease.
For the lessee it is a finance lease
For the lessor it is a sales-type lease
(a) For finance lease, the lease agreement satisfies the 90% of fair value requirement
		Lease Payment	$14,999
PV of Lease Payments:
PV of rental payments (14999*3.72325)	$55,845
PV of guaranteed residual value (20770*0.82270)	$17,087
PV of lease payments $60,830	$72,933

b)
Date	Account Titles and Explanation	Debit	Credit
Jan. 1	Right-of-Use Asset	$55,845
	Lease Liability		$55,845
	(To record lease)
Jan. 1	Lease Liability	$14,999
	Cash		$14,999
	(To records first lease payment)
Dec. 31	Interest Expense	$2,042
	Lease Liability ((55845-14999)*5%)		$2,042
	(To record accrued interest)
Dec. 31	Amortization Expense	$13,961
	Right-of-Use Asset (55845/4)		$13,961
	(To record amortization expense)
Date	Account Titles and Explanation
Jan. 1	Lease Receivable	$78,692
	Cost of Goods Sold (58720-17087)	$41,633
	Sales Revenue (78692-17087)		$61,605
	Inventory		$58,720
	(To record lease)
Jan. 1	Cash	$14,999
	Lease Receivable		$14,999
	(To record first lease payment)
Dec. 31	Lease Receivable	$3,185
	Lease Revenue ((78692-14999)*5%)		$3,185
	(To record lease revenue)

A. Classification of the lease, and describe the nature of the lease.

For the lessee, it is an operating lease

For the lessor, it is a sales-type lease