Brief Exercise 21-11

Assume that IBM leased equipment that was carried at a cost of $174,000 to Sandhill Company. The term of the lease is 5 years December 31, 2019, with equal rental payments of $39,661 beginning December 31, 2019. The fair value of the equipment at commencement of the lease is $174,001. The equipment has a useful life of 5 years with no salvage value. The lease has an implicit interest rate of 7%, no bargain purchase option, and no transfer of title. Collectibility of lease payments for IBM is probable. Assume the sales-type lease was recorded at a present value of $174,001. Prepare IBMs December 31, 2020, entry to record the lease transaction with Sandhill Company.