Question

Assume that IBM leased equipment that was carried at a cost of $178,000 to Sandhill Company. The term of the lease is 7 years December 31, 2019, with equal rental payments of $30,044 beginning December 31, 2019. The fair value of the equipment at commencement of the lease is $173,250. The equipment has a useful life of 7 years with no salvage value. The lease has an implicit interest rate of 7%, no bargain purchase option, and no transfer of title. Collectibility of lease payments for IBM is probable.

Prepare IBM’s December 31, 2019, journal entries at commencement of the lease. (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

Answer
Date	Account Titles and Explanation	Debit	Credit
Dec 31, 2019	Lease Receivable	$     173,250
	Cost of goods sold	$     178,000
	Sales		$     173,250
	Equipment		$     178,000
	(To record commencement of lease)
Dec 31, 2019	Cash	$       30,044
	Lease Receivable		$       30,044
	(To record first receipt of first lease rental)