Question

Cullumber Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $86,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Cullumber expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020.

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Part 1

Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (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		Rent Receipt/ Payment		Interest Revenue/ Expense		Reduction of Principal		Receivable/ Liability
1/1/20		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places
12/31/20		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
12/31/21		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
12/31/22		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places

eTextbook and Media

List of Accounts

Part 2

Prepare the journal entry at commencement of the lease for Cullumber. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

Part 3

Prepare the journal entry at commencement of the lease for Sharrer. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount

eTextbook and Media

List of Accounts

Part 4

Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Cullumber’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $7,500. (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
1/1/20	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount

Answer 1

Part 1
Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (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.)
Annual lease payments = $86,000/ PVOA(8%3)	$                                                  33,370.84
Present value of an ordinary annuity of 1 for 3 periods at 8%	$2.57710
Date	Rent Receipt/ Payment	Interest Revenue/ Expense	Reduction of Principal	Receivable/ Liability
1/1/20				$      86,000
12/31/20	$                                                       33,371	$        6,880	$      26,491	$      59,509
12/31/21	$                                                       33,371	$        4,761	$      28,610	$      30,899
12/31/22	$                                                       33,371	$        2,472	$      30,899	$               0
Part 2
Prepare the journal entry at commencement of the lease for Cullumber. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date	Account Titles and Explanation	Debit	Credit
1/1/20	Lease Receivable	$ 86,000.00
	Cost of Good Sold	$ 65,000.00
	Sales		$ 86,000.00
	Inventory		$ 65,000.00
Part 3
Prepare the journal entry at commencement of the lease for Sharrer. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date	Account Titles and Explanation	Debit	Credit
1/1/20	Right of Use asset	$      86,000
	Lease Liability		$      86,000

Date	Account Titles and Explanation	Debit	Credit
1/1/20	Right of Use asset	$      93,500
	Cash		7500
	Lease Liability		$      86,000