Question

Crane Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $91,000. 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, 2017. Crane 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, 2017. Click here to view the factor table. 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 1/1/17 $ $ $ $ 12/31/17 12/31/18 12/31/19

Prepare the journal entry at commencement of the lease for Crane. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit 1/1/17

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 1/1/17

Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Crane’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $13,000.

Answer 1

Part-1
Journal Entry - Lessor
Date	Account Tittle & Explanation	Debit	Credit
01-01-2017	Lease Receivable (35311*3)	1,05,933
	Machine Leased to Other		91,000
	Unearned Interest Revenue		14,933
	To Record Lease at Commencement
	Cost of Goods Sold	65,000
	Inventory		65,000
	To Record the cost of Inventory
Note: Refer Working Note-1
Journal Entry - Lessee
Date	Account Tittle & Explanation	Debit	Credit
01-01-2017	Machine Leased to Other	1,05,933
	Lease Liability		1,05,933
	To Record Lease at Commencement

Working Note:-1

Computation of Annual Lease Rent

Annual Lease Rent= Fair Value of Lease/ PVAF @ 8% for 3 year

=91000/ 2.57710=$35311

Part-2: Lessee ( At Commencement of Lease)
Date	Account Tittle & Explanation	Debit	Credit
	Machine Leased to Other	1,07,850
	Lease Liability ($35950*3 year)		1,07,850
	To Record commencement of Lease
	Direct Cost	13,000
	Cash		13,000
	TO Record Indirect Cost
Note: Refer Working Note-2

Working Note:-2

Computation of Annual Lease Rent

Annual Lease Rent= Fair Value of Lease/ PVAF @ 9% for 3 year

=91000/ 2.5313=$35950