Question

On January 1, 2020, Teal Mountain Co. leased a building to Sandhill Inc. The relevant information related to the lease is as follows. 1. The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,700,000 (unguaranteed). 2. The leased building has a cost of $4,200,000 and was purchased for cash on January 1, 2020. 3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. 4. Lease payments are $275,000 per year and are made at the beginning of the year. 5. Sandhill has an incremental borrowing rate of 6%, and the rate implicit in the lease is unknown to Sandhill. 6. Both the lessor and the lessee are on a calendar-year basis.

Answer 1

Journal Entries in the books of Teal Mountain Co.
Date	Particulars	Amount(Dr.)	Amount(Cr.)
01-01-2020	Building A/c                             Dr.	$42,00,000.00
	To Cash A/c		$42,00,000.00
	(Being Building purchase)
01-01-2020	Cash A/c                                   Dr.	$2,75,000.00
	To Sandhill Inc. A/c		$2,75,000.00
	(Being Amount Received)
01-01-2020	Sandhill Inc.   A/c          Dr.	$2,75,000.00
	To Unearned Lease Reveune.		$2,75,000.00
	(Being Amount Received of Building Lease )
31-12-2020	Unearned Lease Revenue     Dr.	$2,75,000.00
	To Lease on Rental		$2,75,000.00
	(Being Income earned)
31-12-2020	Depreciaton A/c             Dr.	$84,000.00
	To Building A/c		$84,000.00
	(Being Depreciation charge on building)
Journal Entries in the books of Sandhill Inc.
Date	Particulars	Amount(Dr.)	Amount(Cr.)
01-01-2020	Building A/c        Dr.	$20,24,055.00
	To   Teal Mountain co.		$20,24,055.00
	(Being Lease building recorded on Present Value)
01-01-2020	Teal Mountain co. A/c    Dr.	$2,75,000.00
	To Cash A/c		$2,75,000.00
	(Being Payment made)
31-12-2020	Finance Charges A/c        Dr.	$12,144.00
	To Teal Mountain Co. A/c		$12,144.00
	(Being Finance charges 1st year )
31-12-2020	Depreciation A/c            Dr	$2,02,405.00
	To   Building   A/c		$2,02,405.00
	(Being Depreciation Charge)
31-12-2020	Profit & Loss A/c      Dr.	$2,14,549.00
	To   Finance Charges    A/c		$12,144.00
	To Depreciation          A/c		$2,02,405.00
	(Being Transfer to P&L A/c)
Note
Year	Lease Payment including Ungarented residual Value	IRR@6%	Present Value
1	275000.00	0.9434	259435.00
2	275000.00	0.89	244750.00
3	275000.00	0.8396	230890.00
4	275000.00	0.7921	217827.50
5	275000.00	0.7473	205507.50
6	275000.00	0.705	193875.00
7	275000.00	0.6651	182902.50
8	275000.00	0.6274	172535.00
9	275000.00	0.5919	162772.50
10	275000.00	0.5584	153560.00
	2750000.00		2024055.00
URV	370000.00	0.5584	206608.00
	3120000.00		2230663.00
	Unearned Finance Income		889337.00