Question
Monty Corporation entered into a lease agreement on January 1, 2020, to provide Sandhill Company with a piece of machinery. The terms of the lease
Monty Corporation entered into a lease agreement on January 1, 2020, to provide Sandhill Company with a piece of machinery. The terms of the lease agreement were as follows.
1. The lease is to be for 3 years with rental payments of $14,718 to be made at the beginning of each year.
2. The machinery has a fair value of $68,000, a book value of $40,000, and an economic life of 8 years.
3. At the end of the lease term, both parties expect the machinery to have a residual value of $30,000, none of which is guaranteed.
4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
5. The implicit rate is 5%, which is known by Sandhill. 6. Collectibility of the payments is probable.
(a). Prepare the amortization schedules Sandhill will use over the lease term.
(b). Prepare the 2020 journal entries for Sandhill.
(c). Prepare the 2020 journal entries for Monty.
(d). Suppose the lease were only for one year instead of 3 years, with just one lease payment at the beginning of the lease term. Prepare any journal entries Sandhill would need, assuming it elects to use the short-term lease option.
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