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IrinaK [193]
3 years ago
8

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.
Business
1 answer:
juin [17]3 years ago
7 0

Answer:

Fair value                            $238,500

Less: PV of residual value <u>$17,687    </u> (19500*0.90703)

PV of lease payment          <u>$220,813 </u>

<u />

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)

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Answer and Explanation:

The preparation of the income statement is presented below:

                                     Equinox Products Inc.

                                        Income Statement

                     For the Year Ended December 31, 20Y8

Sales                                                                                    $5,313,000

Less: Cost of goods sold                                                   -3,700,000

Gross profit                                                                       $1,613,000

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Sales salaries expense          $385,000

Sales commissions                 $185,000

Advertising expense               $150,000

Depreciation expense-

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Delivery expense $30,000

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Miscellaneous selling expense $14,000

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