Question

Wildhorse Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $95,500. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Wildhorse expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020.

Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (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.)

Date		Rent Receipt/ Payment		Interest Revenue/ Expense		Reduction of Principal		Receivable/ Liability
1/1/20		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places
12/31/20		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
12/31/21		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
12/31/22		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places

Prepare the journal entry at commencement of the lease for Wildhorse. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount

Prepare the journal entry at commencement of the lease for Sharrer. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on January 1	enter a debit amount	enter a credit amount

Answer 1

Fair value of Asset: 95500

Implicit discount rate = 8%

Term is 3 years. So, Lease rental = 95500/(PV 8% for 3 years)

ie., 95500/(2.5771) = 35057.

So,

Date	Lease rent	Interest		Reduction of Principal		Principal O/s
1/1/2020							95500
31/12/20	37057	95500*8/100	7640	37057-7640 =	29417	95500-29417	66083
31/12/21	37057	66083*8/100	5287	37057-5286 =	31771	66083-31771	34312
31/12/22	37057	34312*8/100	2745	37057-2745 =	34312	34312-34312	0

1.The journal entry at commencement of the lease for Wildhorse:

Lease rent receivable a/c Dr	95500
Cost of Goods sold a/c Dr	65000
To Sales Revenue		95500
To Inventory		65000

2. The journal entry at commencement of the lease for Sharrer:

Right of Use asset a/c Dr	95500
To Lease Liabiility a/c		95500