Question

Exercise 21A-6 a-b

Teal Mountain Leasing Company signs a lease agreement on January 1, 2017, 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. 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 2017 and 2018. (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.) Assuming that Sandhill exercises its option to purchase the equipment on December 31, 2018, 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.)

Answer 1

In this lease Contract firstly we have to,

Calculating annual lease payment

Cost (Fair value) to lessor		$349,000
Less: PV of Salvage value	(25,000*0.9070(w1))	$22,675
Amount to be recovered through lease payments	(349000-22675)	$326,325
Two Periodic Lease payments:	(326,325/2)	163,162.5

W1) Discount factor

Salvage value PV @5% after 2year= = 0.9070

Prepare amortization Table to find Interest

year	Opening	Effective Interest @5%	Accrued Repayments	Recovery Of Lease Receivable(4-3)	Closing (2-5)
2017	349,000	(349000*5%)=17,450	163,162.5(table1)	(163162.5-17450)=145,712.5	(349000-145712.5)=203,287.5
2018	203,287.5	(203287.5*0.05=10,164	163,162.5	152998.5	50,288.5

Journal Entries in Accounts of lessor will be

		Debit	Credit
1/1/2017	Lease Receivable	349,000
	Equipments		349,000
31/12/2017	Cash	163,162.5(annual repay)
	Lease Receivable(recovered)	Table 2	145,712.5
	Interest Receivable		17,450
31/12/2018	Cash	163,162.5
	Lease Receivable		152,998.5
	Interest Receivable		10,164
b) If option to purchase exercise
	Cash	25,000
	Lease Receivable		25,000
	Loss Recognised (profit and loss)	(50288.5(table2)-25,000)	27,288.5