Question

*Exercise 21A-6 a-b Sage Hill Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Oriole 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. Oriole has the option to purchase the equipment for $22,500 upon termination of the lease. It is not reasonably certain that Oriole will exercise this option. 2. The equipment has a cost of $250,000 and fair value of $273,000 to Sage Hill Leasing. The useful economic life is 2 years, with an unguaranteed residual value of $22,500. 3. Sage Hill Leasing desires to earn a return of 5% on its investment. 4. Collectibility of the payments by Sage Hill Leasing is probable. Click here to view the factor table. Your answer is partially correct. Try again. Prepare the journal entries on the books of Sage Hill Leasing to reflect the payments received under the lease and to recognize income for the years 2017 and 2018. (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.) Credit Date 1/1/17 Account Titles and Explanation Lease Receivable Cost of Goods Sold Sales Revenue Debit 273000 1229592 273000 229592 Inventory 12/31/17 Cash 146585 Lease Receivable Interest Revenue 12/31/18 Cash 0 (146585 132935 113650 0 6579 (140006 Lease Receivable Tinterest Revenue Your answer is correct. Assuming that Oriole exercises its option to purchase the equipment on December 31, 2018, prepare the journal entry to record the sale on Sage Hill Leasing's books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit 12/31/18 Cash 225000 Lease Receivable 22500

Answer 1

Annual Lease Payments P.V n = 2,1 =5% Present Value of Annual Lease Payment Add Present Value of residual value (22500* 90703) Present Value of Lease Payable 135845 1.85941 252592 20408 273000 Cost (fair market Value) of Leased asset to lessor Less, Present Value of salvage Value (22500 * 90703) Amount to be recovered through Lease Payments Present Value of Annuity Amount of Periodic payments 273000 20408 252592 1.85941 135845 Debit Credit Date Account title & explanation 2017 1-Jan Lease Receivable Cost of Goods Sold Sales Revenue Equipment 273000 229592 252592 250000 135,845 31-Dec Cash Lease Receivable Interest Revenue 122,195 13,650 64 31-Dec Cash 158,345 67 Lease Receivable Interest Revenue 150,805 7,540

69 Beginning 70 of Year Annual Lease Payment Plus Residual Value Interest (5%) on Lease Receivable Lease Receivable Recovery of Lease Receivable (Col. 2-Col.3) 74 1-Jan 31-Dec 31-Dec 135,845 158,345 13,650 7,540 122,195 150,805 273,000 150,805 (0) Debit Credit 77 Date Account title & explanation 78 12/31/2018 Cash 79 Lease Receivable 22,500 22,500