Reference no: EM132323956

Question

On January 1, 2017, Martinez Company leased equipment to Sandhill Corporation. The following information pertains to this lease.

1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.

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 $176,000, and its cost is $140,800.

4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $11,000. Sandhill depreciates all of its equipment on a straight-line basis.

5. Martinez set the annual rental to ensure an 12% rate of return. Sandhill's incremental borrowing rate is 13%, and the implicit rate of the lessor is unknown.

6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

(Both the lessor and the lessee's accounting period ends on December 31.)

Calculate the amount of the annual rental payment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

The amount of the annual rental payment$enter the amount of the annual rental payment rounded to 0 decimal places

Prepare the necessary journal entries for Sandhill for 2017. (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. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Prepare the necessary journal entries for Martinez for 2017. (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. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)