Question

On January 1, 2017, Sunland Company leased equipment to Flynn Corporation. The following information pertains to this lease:

1.		The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $5,000.
2.		Equal rental payments are due on January 1 of each year, beginning in 2017.
3.		The fair value of the equipment on January 1, 2017, is $140,000, and its cost is $110,000.
4.		The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.
5.		Sunland set the annual rental to ensure a 5% rate of return. Flynn’s incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown.
6.		Collectibility of lease payments by the lessor is probable.

Both the lessor and the lessee’s accounting periods end on December 31.

Computation of annual rental payment (by the lesssor):

Fair value of leased asset		$140,000
Less: Present value of bargain-purchase option ($2,000 × 0.74622*)		$1,492
PV of lease payments		$138,508
Six annual lease payments: $138,508 ÷ 5.32948**		$25,989

*Present value of $1 at 5% for 6 periods.
**Present value of an annuity due at 5% for 6 periods.

Prepare all the necessary journal entries for Sunland for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
1/1/17
	(To record the lease)
	(To record lease payment)
12/31/17

Answer 1

	Date	Account titles and explanation				Debit	Credit
	1/1/2017	Lease receivable				140000
		Cost of goods sold				110000
		Sales revenue					140000
		Equipment					110000
		(Lease recorded)
		Cash				25989
		Lease receivable					25989
		(Lease payment received)
	12/31/2017	Interest receivable		(140000-25989)*5%		5701
		Interest revenue					5701
		(Interest on lease due)