Question

Brief Exercise 21A-27 Sandhill Co. leased machinery from Young, Inc. on January 1, 2017. The lease term was for 8 years, with equal annual rental payments of $5,300 at the beginning of each year. In addition, the lease provides an option to purchase the machinery at the end of the lease term for $2,000, which Sandhill is reasonably certain it will exercise as it believes the fair value of the machinery will be at least $6,000. The machinery has a useful life of 10 years and a fair value of $45,000. The implicit rate of the lease is not known to Sandhill, Sandhill's incremental borrowing rate is 6%. Prepare Sandhill's 2017 journal entries. (Credit account titles are automatically indented when the 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.) Click here to view the factor table. Date Account Titles and Explanation Debit Credit 1/1/17 (To record lease liability) 1/1/17 (To record lease payment) 12/31/17 (To record interest expense) 12/31/17 (To record amortization of the right-of-use asset)

Answer 1

Sandill Co Annual Installments $ PV of annuity due ( 6%, 8 years) Right of Use Asset ($ 5,300 x 7.80169) $ 5,300 6.58238 34,887 Annual Amortization = $ $ 34,887 / 8 4,361 Credit $ 34,887 $ 5,300 Journal Entries in the books of Sandhill Co. Date Accounts Titles and explaination Debit 01-01-2017 Right of Use Asset $ 34,887 Lease Liability (To record lease liability) 01-01-2017 Lease Liability $ 5,300 Bank (To record lease payment) 31-12-2017 Interest Expense $ 1,775 Lease Liability (To record interest exp ($34887 - $5300) x 6%) 31-12-2017 Amortization Expense $ 4,361 Right to use Asset (To record amortization of right of use asset) $ 1,775 $ 4,361

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