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 $25,000 upon termination of the lease. It is not reasonably certain that Sandhill will exercise this option.
2.		The equipment has a cost of $300,000 and fair value of $349,000 to Teal Mountain Leasing. The useful economic life is 2 years, with a residual value of $25,000.
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 2020 and 2021.

Three total journal entries needed. The first one has 4 accounts available, and the remaining two entries have three accounts available.

Answer 1

Answer :

Fair value	349000
Less: Present value of resudual value (25000*0.90703)	22676
Present value of lease payments	326324
Annual lease payment (326324/1.85941)	175499

Date	Account title and explanation	Debit	Credit
1/1/20	Lease receivable	349000
	Cost of goods sold (300000)-(22676)	277324
	Sales (PV of lease payment)		326324
	Inventory or Equipment		300000
	(To record the lease)
12/31/21	Cash	175499
	Lease Receivable (Plug)		158049
	Interest Revenue (273000*5%)		17450
	(To record the receipt of lease installment)
12/31/21	Cash	175499
	Lease Receivable (Plug)		165951
	Interest Revenue (349000 - 158049)*5%		9548
	(To record the receipt of lease installment)