Question

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Sandhill Incorporated leases a piece of machinery to Indigo Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $16,673 to be made at the beginning of each year. 2. The machinery' has a fair value of $87,056, a book value of $64,960, and an economic life of 10 years. At the end of the lease term, both parties expect the machinery to have a residual value of $32,480. To protect against a large 3. loss, Sandhill requests Indigo to guarantee $23,110 of the residual value, which Irving agrees to do. The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is 4. not of a specialized nature. 5. The implicit rate is 5%, which is known by Indigo. 6. Collectibility of the payments is probable. Click here to view factor tables. Evaluate the criteria for classification of the lease, and describe the nature of the lease. For the lessee, it is a finance lease 4 , and for the lessor, it is a sales-type lease

Answer 1

	Amount	PV @ 5%	PV
PV of Rental Payments	$16673	3.72325	$62077.75
PV of guaranteed residual	$32480	0.82271	$26721.62
Initial Lease liability			$88799.4

Date	Account Titles and Explanation	Debit	Credit
Jan 1 2020	Right of use assets	$88799.4
	Lease Liability		$88799.4
	(To record lease liability)
Jan 1 2020	Lease Liability	$16673
	Cash		$16673
	(To record first lease payment)
Dec 31 2020	Interest Expense	$ 3606.3
	Lease Liability ((88799.4-16673)*5%)		$ 3606.3
	(To record interest expense accrued)
Dec 31 2020	Amortization Expense	$22199.85
	Right of use assets (88799.4/4		$22199.85
	(To record amortization expense)

Date	Account Titles and Explanation	Debit	Credit
Jan 1 2020	Lease Receivable (Fair Value)	$87056
	Cost of goods sold (64960-32480)	$32480
	Sales Revenue (87056-32480)		$54756
	Inventory (Book Value)		$64980
	(To record lease)
Jan 1 2020	Cash	$16673
	Lease Receivable		$16673
	(To record first lease payment)
Dec 31 2020	Lease Receivable	$ 3519.15
	Lease revenue ((87056-16673)*5%)		$ 3,519.15
	(To record lease revenue)

Date	Account Titles and Explanation	Debit	Credit
Jan 1 2020	Lease Receivable (Fair Value)	$87056
	Cost of goods sold (64960-32480)	$32480
	Sales Revenue (87056-32480)		$54756
	Inventory (Book Value)		$64960
	(To record lease)
Jan 1 2020	Cash	$16673
	Lease Receivable		$16673
	(To record first lease payment)
Dec 31 2020	Lease Receivable	$ 3519.15
	Lease revenue ((87056-16673)*5%)		$ 3,519.15
	(To record lease revenue)
	No Guranteed Residual Value: (Operating Lease)
Date	Account	Debit	Credit
Jan 1 2020	Right of use assets	$88799.4
	Lease Liability		$88799.4
	(To record lease liability)
Jan 1 2020	Lease Liability	$16673
	Cash		$16673
	(To record first lease payment)
Dec 31 2020	Lease Expense	$16673
	Lease Liability		$ 3606.3
	Right of use assets		$13066.7
	(To record interest and amortization)
Date	Account Titles and Explanation	Debit	Credit
Jan 1 2020	Cash	$16673
	Unearned Lease Revenue		$16673
	(To record lease)
Dec 31 2020	Unearned Lease Revenue	$16673
	Lease Revenue		$16673
	(To record lease revenue)
Dec 31 2020	Depreciation Expense	$ 6496
	Accumulated Depreciation-Lease Machinery		$ 6496
	(64960/10)