Sandhill Company, a machinery
Sandhill Company, a machinery dealer, leased a machine to DexterCorporation on January 1, 2020. The lease is for an 8-year periodand requires equal annual payments of $30,232 at the beginning ofeach year. The first payment is received on January 1, 2020.Sandhill had purchased the machine during 2016 for $105,000.Collectibility of lease payments by Sandhill is probable. Sandhillset the annual rental to ensure a 6% rate of return. The machinehas an economic life of 10 years with no residual value and revertsto Sandhill at the termination of the lease.
Compute the amount of the lease receivable. (Forcalculation purposes, use 5 decimal places as displayed in thefactor table provided and round final answer to 0 decimal placese.g. 5,275.)
Amount of the lease receivable |
$enter a dollar amount of the lease receivable rounded to 0decimal places |
Prepare all necessary journal entries for Sandhill for 2020.(Credit account titles are automatically indented whenamount is entered. Do not indent manually. Round answers to 0decimal places e.g. 5,275.)
Suppose the collectibility of the lease payments was notprobable for Sandhill. Prepare the necessary journal entry for thecompany in 2020. (Credit account titles areautomatically indented when amount is entered. Do not indentmanually.)
Suppose at the end of the lease term, Sandhill receives theasset and determines that it actually has a fair value of $1,190instead of the anticipated residual value of $0. Record the entryto recognize the receipt of the asset for Sandhill at the end ofthe lease term. (Credit account titles areautomatically indented when amount is entered. Do not indentmanually. Round answers to 0 decimal places e.g.5,275.)
Answer:
Answer :-
The amount of the lease receivable are as follows:-
In the question it was given that The lease is for an 8-yearperiod and requires equal annual payments of $30,232 at thebeginning of each year. So there is 8 installment of annualpayment.And Sandhill set the annual rental to ensure a 6% rate ofreturn . Therefore,PV factor = 6% rate of return.
Therefore,
Amount of lease receivable = $198,999.
Necessary journal entries for Sandhill for 2020 are as follows:-
Date | Account Titles and Explanation | Debit | Credit |
1/1/20 | Lease receivable A/c Dr. | $198,999 | |
Cost of goods sold A/c Dr. | $105,000 | ||
To Sales A/c | $198,999 | ||
To Inventory A/c | $105,000 | ||
(To record the lease) | |||
Cash A/c Dr. | $30,232 | ||
To Lease receivable A/c | $30,232 | ||
(To record the first lease payment) | |||
12/31/20 | Interest receivable A/c Dr. | $10,126 | |
To Interest revenue A/c [($198,999 – $30,232) × 6% rate] |
$10,126 | ||
(To record interest receivable for 2020) |
The collectibility of the lease payments was not probable forSandhill. Prepare the necessary journal entry for the company in2020 –
1/1/2020 | Cash A/c Dr. | $30,232 | |
To Deposit Liability A/c | $30,232 | ||
( To record the collectibility of the lease payments was notprobable ) |
Suppose at the end of the lease term, Sandhill receives theasset and determines that it actually has a fair value of $1,190instead of the anticipated residual value of $0. Record the entryto recognize the receipt of the asset for Sandhill at the end ofthe lease term
1/1/2020 | Inventory A/c Dr. | $1,190 | |
To Gain on Lease A/c | $1,1900 |