Question

Sandhill Inc. was incorporated in 2019 to operate as a computer software service firm, with an accounting fiscal year ending August 31. Sandhill’s primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system.

Sandhill has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of $47,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years.

All rentals are payable on the first day of the month beginning with August 1, 2020, the date the computer was installed and the lease agreement was signed. The lease is non-cancelable for its 12-year term, and it is secured only by the manufacturer’s chattel lien on the Alpha-3 system.

This lease is to be accounted for as a finance lease by Sandhill, and it will be amortized by the straight-line method. Borrowed funds for this type of transaction would cost Sandhill 6% per year (0.50% per month). Following is a schedule of the present value of an annuity due for selected periods discounted at 0.50% per period when payments are made at the beginning of each period.

Periods (months)		Present Value of an Annuity Due Discounted at 0.50% per Period
1		1.000
2		1.995
3		2.985
143		102.497
144		102.987

Prepare all entries Sandhill should have made in its accounting records during August 2020 relating to this lease. Remember, August 31, 2020, is the end of Sandhill’s fiscal accounting period, and it will be preparing financial statements on that date. Do not prepare closing entries.

Answer 1

Answer:

Date	General Journal	Debit	Credit
Aug.01	Leased assets	$   4,864,359
	Lease liability		$ 4,864,359
Aug.01	Lease liability	47,000
	Cash		47,000
Aug.31	Interest expense (4,864,359 - 47,000)*.050%	24,087
	Interest payable		24,087
Aug.31	Depreciation expense [(4,864,359 /12)*1/12]	33,780
	Accumulated depreciation		33,780