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Sheridan Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2020. The lease is for an 8-year period and requires equal annual payments of $31,448 at the beginning of each year. The first payment is received on January 1, 2020. Sheridan had purchased the machine during 2016 for $116,000. Collectibility of lease payments by Sheridan is probable. Sheridan set the annual rental to ensure a 6% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Sheridan at the termination of the lease.
1. Compute the amount of the lease receivable.
2. Prepare all necessary journal entries for Sheridan for 2020.
3. Suppose the collectibility of the lease payments was not probable for Sheridan. Prepare the necessary journal entry for the company in 2020.
4. Suppose at the end of the lease term, Sheridan receives the asset and determines that it actually has a fair value of $980 instead of the anticipated residual value of $0. Record the entry to recognize the receipt of the asset for Sheridan at the end of the lease term.

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Answer:

1. $ 207,003.32

2. Dec 1 2020

Dr Lease Receivable $ 207,003.32

Dr Cost of good sold $116,000

Dr Sales $ 207,003.32

Cr Inventory $ 116,000.00

Dr Cash $31,448

Cr Lease Receivable $31,448

Dec 31 2020

Dr Interest Receivable $10,533.32

Cr Interest Revenue $10,533.32

3. Dr Cash $31,448

Cr Deposit Liability $31,448

4. Dr Inventory 980

Cr Gain on lease (Residual value) 980

Explanation:

1 Computation for the amount of the lease receivable

Annual Payments $31,448

x PVAD (6%,8 years ) $6.5824

Amount of lease receivables $ 207,003.32

($31,448*$6.5824)

Therefore the amount of the lease receivable will be $ 207,003.32

2. Preparation of all necessary journal entries for Sheridan for 2020.

Dec 1 2020

Dr Lease Receivable $ 207,003.32

Dr Cost of good sold $116,000

Dr Sales $ 207,003.32

Cr Inventory $ 116,000.00

(Being to record Lease Receivable)

Dr Cash $31,448

Cr Lease Receivable $31,448

(Being to record first lease Receivable)

Dec 31 2020

Dr Interest Receivable $10,533.32

[ ($ 207,003.32 - $31,448 ) x 6%]

Cr Interest Revenue $10,533.32

3. Preparation of the necessary journal entry for the company in 2020.

Dr Cash $31,448

Cr Deposit Liability $31,448

4. Preparation of the entry to recognize the receipt of the asset for Sheridan at the end of the lease term.

Dr Inventory 980

Cr Gain on lease (Residual value) 980

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