On January 1, 2017, Sunland Company leased equipment to Flynn Corporation. The following information pertains to…

On January 1, 2017, Sunland Company leased equipment to Flynn
Corporation. The following information pertains to this
lease:

1.

The term of the non-cancelable lease is 6 years. At the end of
the lease term, Flynn has the option to purchase the equipment for
$2,000, while the expected residual value at the end of the lease
is $5,000.

2.

Equal rental payments are due on January 1 of each year,
beginning in 2017.

3.

The fair value of the equipment on January 1, 2017, is
$140,000, and its cost is $110,000.

4.

The equipment has an economic life of 8 years. Flynn
depreciates all of its equipment on a straight-line basis.

5.

Sunland set the annual rental to ensure a 5% rate of return.
Flynn’s incremental borrowing rate is 6%, and the implicit rate of
the lessor is unknown.

6.

Collectibility of lease payments by the lessor is
probable.

Both the lessor and the lessee’s accounting periods end on December
31.
Computation of annual rental payment (by the lesssor):

Fair value of leased asset

$140,000

Less: Present value of bargain-purchase option ($2,000 ×
0.74622*)

$1,492

PV of lease payments

$138,508

Six annual lease payments: $138,508 ÷ 5.32948**

$25,989

*Present value of $1 at 5% for 6 periods.

**Present value of an annuity due at 5% for 6 periods.
Prepare all the necessary journal entries for Sunland for 2017.
(Credit account titles are automatically indented when
the amount is entered. Do not indent manually. Round answers to 0
decimal places, e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

1/1/17

(To record the lease)

(To record lease payment)

12/31/17