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Question 11 of 11 < - / 10 View Policies Current Attempt in Progress Bramble Leasing Company agrees to lease equipment to Sunland Corporation on January 1, 2020. The following information relates to the lease agreement 1. 2 3. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. The cost of the machinery is $565,000, and the fair value of the asset on January 1, 2020, is $752,000. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Sunland estimates that the expected residual value at the end of the lease term will be 50,000. Sunland amortizes all of its leased equipment on a straight-line basis. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. The collectibility of the lease payments is probable. Bramble desires a 10% rate of return on its investments. Sunland's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown 4 5. 6. (Assume the accounting period ends on December 31.) Click here to view factor tables.

Answer 1

Answer
a)	The nature of this lease for both the lessee and the lessor
	This is a FINANCE LEASE for Sunland
	This is a FINANCE LEASE for Bramble
	Because This lease satisfies the criteria of finance lease i.e., Lease period covers more than 75% of the economic life of the asset
	In the given question, Lease period was 7 years whereas the economic life of the asset is 9 years
	i.e., 7 years out of 9 years = 78% of the economic life of the asset
	This is a sale-type deal for lessor, if the fair value of the asset ($ 752,000) is equal to the cost of the asset to lessor ($ 565,000)

b)	Calculation of annual rental payment
=	$ 752,000 - ($ 107,429 x 0.51316) / 5.35526
=	$ 130,128
	Annual Rental Payment = $ 130,128
Note: *	Present value of 1$ at 10% for 7 years = 0.51316
**	Present value of annuity due at 10% for 7 years = 5.35526
***	$ 752,000 / 7 = $ 107,429
c)	Computation of lease liability to the leasee - Present value of minimum lease payment
	Present value of annual payments = $ 130,128 x 5.23054 = $ 680,640
	Present value of guaranteed residual value = $ 50,000 x 0.48166 = $ 24,083
	Present value of Minimum lease payment = PV of annual payments + PV of guaranteed residual value
=	$ 680,640 + $ 24,083
=	7,04,723
	Present value of minimum lease payment = $ 704,723
Note: *	Present value of 1$ at 11% for 7 years = 0.48166
**	Present value of annuity due at 11% for 7 years = 5.23054
d)	Journal entries in the books of Sunland for the year 2020 and 2021
	Date	Particulars	Debit ($)	Credit ($)
	01-01-2020	Lease Equipment A/c                   Dr.	7,04,723
		To Lease liability A/c		7,04,723
		(To record lease)
	01-01-2020	Lease Liability A/c                           Dr.	1,30,128
		To Cash A/c		1,30,128
		(To record lease payment)
	31-12-2020	Interest Expense A/c                             Dr.	63,205
		To Interest Payable A/c		63,205
		(To record interest)
		($ 704,723 - $ 130,128) x 11% = $ 63,205
	31-12-2020	Depreciation A/c                            Dr.	85,328
		To Accumulated depreciation A/c		85,328
		(To record amortization)
		($ 704,723 - $107,429) / 7 = $ 85,328
	01-01-2021	Lease Liability A/c                           Dr.	66,923
		Interest Payable A/c                      Dr.	63,205
		To Cash A/c		1,30,128
		(To record lease payment)
	31-12-2021	Interest Expense A/c                             Dr.	55,843
		To Interest Payable A/c		55,843
		(To record interest)
		($ 704,723 - $ 130,128 - $ 66,923) x 11% = $ 55,843
	31-12-2021	Depreciation A/c                            Dr.	85,328
		To Accumulated depreciation A/c		85,328
		(To record amortization)
		($ 704,723 - $107,429) / 7 = $ 85,328
e)	Journal entries in the books of Bramble for the year 2020 and 2021
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