Question

Teal Mountain Leasing Company signs a lease agreement on January 1, 2020, 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 $19,500 upon termination of the lease. It is not reasonably certain that Sandhill will exercise this option.
2. The equipment has a cost of $190,000 and fair value of $238,500 to Teal Mountain Leasing. The useful economic life is 2 years, with an unguaranteed residual value of $19,500.
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.

Answer 1

Fair value $238,500

Less: PV of residual value $17,687 (19500*0.90703)

PV of lease payment $220,813

Annual lease = 220813/1.85941

Annual lease = $118,754

Date Account titles and Explanation Debit Credit

1/1/17 Lease receivables $238,500

Cost of goods sold $172,313

Sales $220,813

Inventory $190,000

(To record the lease)

12/31/17 Cash $118,754

Lease receivables $106,829

Interest revenue(238,500*5%) $11,925

(To record the receipts of lease installments)

12/31/18 Cash $118,754

Lease receivables $112,170

Interest revenue(238,500-106829*5%) $6,584

(To record the receipts of lease installments)

12/31/18 Cash $19,500

Lease receivables $19,500

(To record sales of equipment at the end of the lease)