Exercise 21A-6 a-bTeal Mountain Leasing Company signs a lease agreement on January1, 2017, to...Exercise...

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Accounting

Exercise 21A-6 a-b
Teal Mountain Leasing Company signs a lease agreement on January1, 2017, to lease electronic equipment to Sandhill Company. Theterm of the non-cancelable lease is 2 years, and payments arerequired at the end of each year. The following information relatesto this agreement:
1. Sandhill has the option to purchase the equipment for $25,000upon termination of the lease. It is not reasonably certain thatSandhill will exercise this option.
2. The equipment has a cost of $300,000 and fair value of $349,000to Teal Mountain Leasing. The useful economic life is 2 years, witha residual value of $25,000.
3. Teal Mountain Leasing desires to earn a return of 5% on itsinvestment.
4. Collectibility of the payments by Teal Mountain Leasing isprobable.
Prepare the journal entries on the books of Teal MountainLeasing to reflect the payments received under the lease and torecognize income for the years 2017 and 2018. (Creditaccount titles are automatically indented when amount is entered.Do not indent manually. For calculation purposes, use 5 decimalplaces as displayed in the factor table provided and round finalanswers to 0 decimal places, e.g. 5,275.)
Assuming that Sandhill exercises its option to purchase theequipment on December 31, 2018, prepare the journal entry to recordthe sale on Teal Mountain Leasing’s books. (Creditaccount titles are automatically indented when amount is entered.Do not indent manually.)

Answer & Explanation Solved by verified expert

3.8 Ratings (629 Votes)

In this lease Contract firstly we have to,

Calculating annual lease payment

Cost (Fair value) to lessor		$349,000
Less: PV of Salvage value	(25,000*0.9070(w1))	$22,675

Amount to be recovered through lease payments	(349000-22675)	$326,325
Two Periodic Lease payments:	(326,325/2)	163,162.5

W1) Discount factor

Salvage value PV @5% after 2year= = 0.9070

Prepare amortization Table to find Interest

year	Opening	Effective Interest @5%	Accrued Repayments	Recovery Of Lease Receivable(4-3)	Closing (2-5)
2017	349,000	(3490005%)=17,450*	163,162.5(table1)	(163162.5-17450)=145,712.5	(349000-145712.5)=203,287.5
2018	203,287.5	(203287.50.05=10,164*	163,162.5	152998.5	50,288.5

Journal Entries in Accounts of lessor will be

		Debit	Credit
1/1/2017	Lease Receivable	349,000
	Equipments		349,000

31/12/2017	Cash	163,162.5(annual repay)
	Lease Receivable(recovered)	Table 2	145,712.5
	Interest Receivable		17,450

31/12/2018	Cash	163,162.5
	Lease Receivable		152,998.5
	Interest Receivable		10,164
b) If option to purchase exercise
	Cash	25,000
	Lease Receivable		25,000
	Loss Recognised (profit and loss)	(50288.5(table2)-25,000)	27,288.5

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In: AccountingExercise 21A-6 a-bTeal Mountain Leasing Company signs a lease agreement on January1, 2017, to...Exercise 21A-6 a-bTeal Mountain Leasing Company signs a lease agreement on January1, 2017, to lease electronic equipment to Sandhill Company. Theterm of the non-cancelable lease is 2 years, and payments arerequired at the end of each year. The following information relatesto this agreement:1.Sandhill has the option to purchase the equipment for $25,000upon termination of the lease. It is not reasonably certain thatSandhill will exercise this option.2.The equipment has a cost of $300,000 and fair value of $349,000to Teal Mountain Leasing. The useful economic life is 2 years, witha residual value of $25,000.3.Teal Mountain Leasing desires to earn a return of 5% on itsinvestment.4. Collectibility of the payments by Teal Mountain Leasing isprobable.Prepare the journal entries on the books of Teal MountainLeasing to reflect the payments received under the lease and torecognize income for the years 2017 and 2018. (Creditaccount titles are automatically indented when amount is entered.Do not indent manually. For calculation purposes, use 5 decimalplaces as displayed in the factor table provided and round finalanswers to 0 decimal places, e.g. 5,275.)Assuming that Sandhill exercises its option to purchase theequipment on December 31, 2018, prepare the journal entry to recordthe sale on Teal Mountain Leasing’s books. (Creditaccount titles are automatically indented when amount is entered.Do not indent manually.)

1.		Sandhill has the option to purchase the equipment for $25,000upon termination of the lease. It is not reasonably certain thatSandhill will exercise this option.
2.		The equipment has a cost of $300,000 and fair value of $349,000to Teal Mountain Leasing. The useful economic life is 2 years, witha residual value of $25,000.
3.		Teal Mountain Leasing desires to earn a return of 5% on itsinvestment.
		4. Collectibility of the payments by Teal Mountain Leasing isprobable. Prepare the journal entries on the books of Teal MountainLeasing to reflect the payments received under the lease and torecognize income for the years 2017 and 2018. (Creditaccount titles are automatically indented when amount is entered.Do not indent manually. For calculation purposes, use 5 decimalplaces as displayed in the factor table provided and round finalanswers to 0 decimal places, e.g. 5,275.) Assuming that Sandhill exercises its option to purchase theequipment on December 31, 2018, prepare the journal entry to recordthe sale on Teal Mountain Leasing’s books. *(Creditaccount titles are automatically indented when amount is entered.Do not indent manually.)*