SandhillCo. leases equipment toTealInc. on January 1, 2020. The following information relates to the lease agreement.

1.The term of the lease is 5 years with no renewal option, and the machinery has an estimated economic life of 6 years.2.The cost of the machinery is $740,000, and the fair value of the asset on January 1, 2020, is $1,140,000.3.At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $76,000.Tealdepreciates all of its equipment on a straight-line basis.4.The lease agreement requires equal annual rental payments, beginning on January 1, 2020.5.The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.6.Sandhilldesires a10% rate of return on its investments.Teal's incremental borrowing rate is10%.Sandhill's implicit rate is unknown toTeal.

Assume the accounting period ends on December 31.

Sandhill Co. leases equipment to Teal Inc. on January 1, 2020. The fol lowing information relates to the lease agreement. 1. The term of the lease is 5 yea rs with no renewal option, and the machinery has an estimated economic life of 6 years. 2. The cost of the machinery is $740,000, and the fair value of the asset on January 1, 2020, is $1,140,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $76,000. Teal depreciates all of its equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1,2020. 5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. 6. Sandhill desires a 10% rate of return on its investments. Teal's incremental borrowing rate is 10%. Sandhill's implicit rate is unknown to Teal. Assume the accounting period ends on December 31. Determine the nature of this lease for both the lessee and the lessor. Sandhill Company v Teal Company v Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e3. 1.25124 and the nal answer to 0 decimal places as. 58,971.) Annual Lease Payment $ eTextbook and Media List of Accounts Prepare the journal entries Sa ndhill would make in 2020 and 2021. (Round answers to 0 decimal places, e3. 5,125. Credit account titles are automatically indented when amount is entered. Do not indent manually. if no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit Jan. 1,2020 l l (To record sales revenue) \fCompute the present value of the lease payments for Teal. Teal expects the fair value of the equipment to be greater than or equal to $76,000. (Round present value factor calculations to 5 decimal places, eg. 1.25124 and the nal answer to 0 decimal places as. 58,971.) Present Value of the Lease Payments for Teal $ eTextbook and Media List of Accounts Prepare thejournal entries Teal would make in 2020 and 2021 related to the lease arrangement. (Round answers to 0 decimal places, e3. 5,125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit (To record the lease) (To record rental payment) Jan. 1, 2021 (To record depreciation) (To record interest) (To record depreciation) (To record interest)