Question

Sunland Steel Corporation, as lessee, signed a lease agreement for equipment for five years, beginning January 31, 2020. Annual rental payments of $50,000 are to be made at the beginning of each lease year (January 31). The insurance and repairs and maintenance costs are the lessee’s obligation. The interest rate used by the lessor in setting the payment schedule is 9%; Sunland’s incremental borrowing rate is 10%. Sunland is unaware of the rate being used by the lessor. At the end of the lease, Sunland has the option to buy the equipment for $3,900, which is considerably below its estimated fair value at that time. The equipment has an estimated useful life of seven years with no residual value. Sunland uses straight-line depreciation on similar equipment that it owns, and follows IFRS 16.

Using time value of money tables, a financial calculator, or Excel functions, calculate the PV of the lease obligation. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)

Present value

$Enter your answer in accordance to the question statement Prepare the lease amortization schedule for the lease. (Hint: You may find the ROUND formula helpful for rounding in Excel.) (Round answers to 0 decimal places, e.g. 5,275.) Prepare the journal entry that should be recorded on January 31, 2020, by Sunland. (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 factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit Jan. 31, 2020 (To record inception of lease and first lease payment.) Prepare any necessary adjusting journal entries at December 31, 2020, and the journal entry or entries that should be recorded on January 31, 2021, by Sunland. Sunland does not use reversing entries. (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 answers to 0 decimal places, e.g. 5,275.) What amounts would appear on Sunland’s December 31, 2021 SFP relative to the lease arrangement? (Round answers to 0 decimal places, e.g. 5,275.) Assume that the leased equipment had a fair value of $200,000 at the inception of the lease, and that no bargain purchase option is available at the end of the lease. Would your treatment of the lease change for financial reporting purposes? The lease would be accounted as a Choose the answer from the menu in accordance to the question statement                                                                      lease liabilityright-of-use asset and lease liabilityright-of-use assetoperating lease.

Answer 1

Date	Amount	Present value factor 10%	present value
31-Dec-20	$50,000	1	$50,000
31-Dec-21	$50,000	0.9091	$45,455
31-Dec-22	$50,000	0.8264	$41,320
31-Dec-23	$50,000	0.7513	$37,565
31-Dec-24	$50,000	0.683	$34,150
		Total	$208,490

Loan amortization schdule	Annual lease payament	interest expenses 10%	reduction of lease liability $	lease liability $	Calculation
				208490
31-Dec-20	$50,000		50000	158490	(208490-50000)
31-Dec-21	$50,000	15849	34151	124339
31-Dec-22	$50,000	12433.9	21717.1	102621.9
31-Dec-23	$50,000	10262.19	11454.91	91166.99
31-Dec-24	$50,000	9116.699	2338.211	88828.78

Journal Entries
Date	Particulars	Debit $	Credit $
dec 31 2020	Right to use Asset	$208,490
	Lease Liability		$208,490
	(To record Liability)
31-Dec-20	Lease Liability	$50,000
	Cash		$50,000
	(To record lease payments)