Question

Teal Mountain Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Sandhill Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

1.		Sandhill has the option to purchase the equipment for $25,000 upon termination of the lease. It is not reasonably certain that Sandhill will exercise this option.
2.		The equipment has a cost of $300,000 and fair value of $349,000 to Teal Mountain Leasing. The useful economic life is 2 years, with a residual value of $25,000.
3.		Teal Mountain Leasing desires to earn a return of 5% on its investment.
4.		Collectibility of the payments by Teal Mountain Leasing is probable.

Click here to view factor tables.

Part 1

Prepare the journal entries on the books of Teal Mountain Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (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
1/1/2012/31/2012/31/21 1/1/2012/31/2012/31/21	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1 2020	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21 1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
1/1/2012/31/2012/31/21 1/1/2012/31/2012/31/21	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

Part 2

Assuming that Sandhill exercises its option to purchase the equipment on December 31, 2021, prepare the journal entry to record the sale on Teal Mountain Leasing’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
12/31/21	enter an account title for the journal entry on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2021	enter a debit amount	enter a credit amount

Answer 1

Answer:-

Part-1

Journal Entries on the book of Teal Mountain :-

Date	Account Title & Explanation	Debit	Credit
1-1-20	Lease Receivable	349000
	Cost of Goods Sold (300000 - 22676)	277324
	Sales		326324
	Inventory (Equipment)		30000
	(To record the lease)
12-31-20	Cash	175499
	Lease Receivable		158049
	Interest Revenue		17450
	(To record the receipt of lease installment)
12-31-21	Cash	175499
	Lease Receivable		165951
	Interest Revenue (349000 - 158049)* 5%		9548
	(To record the receipt of lease installment)

Working Notes :-

Fair value 349000

Less:- PVR-value (25000 * 0.90703) 22676      

Present value of lease payments       326324

Annual lease Payment (326324/1.85941) 175499.

Part-2

Date	Account Title and Explanation	Debit	Credit
12-31-21	Cash
	Lease Receivable
	(To record the sale of equipment at the end of lease)