Question

Splish Brothers Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Sunland 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. Sunland has the option to purchase the equipment for $24,000 upon termination of the lease. It is not reasonably certain that Sunland will exercise this option.
2. The equipment has a cost of $280,000 and fair value of $330,500 to Splish Brothers Leasing. The useful economic life is 2 years, with a residual value of $24,000.
3. Splish Brothers Leasing desires to earn a return of 5% on its investment.
4. Collectibility of the payments by Splish Brothers Leasing is probable.
Prepare the journal entries on the books of Splish Brothers Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. (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.)

Answer 1

Journal entries

Date Account title Debit Credit

01-01-2017 Lease Receivable(Fair Value) $3,30,500.00

COGS(280000-21769) $2,58,231.00

Sales Revenue(330500-21769) $3,08,731.00

Equipment(Cost) $2,80,000.00

(Inception of lease)

12/31/2017 Cash $1,66,037.00

Lease Receivable $1,49,512.00

Interest income $16,525.00

(1st instalment recd.)(as per table)

12/31/2018 Cash $1,66,037.00

Lease Receivable $1,56,988.00

Interest income $9,049.00

( 2nd & Last instalment recd.)(as per table)

If Sunland exercises the option to purchase:

12/31/2018 Cash $24,000.00

Lease Receivable $24,000.00

Lease Receivable amortisation schedule:

Year Annuity Tow. Int. at 5% Tow. Lease Lease balance

0 $3,30,500.00

1 $1,66,037.00 $16,525.00 $1,49,512.00 $1,80,988.00

2 $1,66,037.00 $9,049.00 $1,56,988.00 $24,000.00

(Residual value)

If purchased $24,000.00 0

Working Note-1

PV of lease payments= Fair value of the equipment= $3,30,500.00

PV of residual value $21,769.00

So,amt.to be recovered thro' 2 end-of-yr. lease payments $3,08,731.00

Using the PV of ordinary annuity formula as under:

308731=Pmt.*(1-1.05^-2)/0.05

Pmt.=308731/((1-1.05^-2)/0.05)= $166037

Step-by-step explanation: