(Carla Vista Leasing Company leases a new machine to Sandhill Corporation. Ihe machine has a cost of $65,000 and fair value of
$94,500. Under the 3-year, non-cancelable contract, Sandhill will receiv

Question

(Carla Vista Leasing Company leases a new machine to Sandhill Corporation. Ihe machine has a cost of $65,000 and fair value of
$94,500. Under the 3-year, non-cancelable contract, Sandhill will receive title to the machine at the end of the lease. The machine has
a 3-year useful life and no residual value. The lease was signed on January 1,2025. Carla Vista expects to earn an 8% return on its
investment, and this implicit rate is known by Sandhill. The annual rentals are payable on each December 31, beginning December 31,
2025.
(e)
Prepare the journal entry at commencement of the lease for Sandhill, assuming (1) Sandhill does not know Carla Vista's implicit
rate (Sandhill’s incremental borrowing rate is 9%), and (2) Sandhill incurs initial directs costs of $12,000. (List all debit entries before
credit entries. 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 O for the amounts. Round final answers to 0 decimal places e.g. 5,275.)
Date Account Titles and Explanation Debit Credit
ns —
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VIPSolutions · Accepted Answer

Let's break down the information and calculate the required journal entry:

### Step 1: **Calculate the Present Value (PV) of Lease Payments**

- **Annual Lease Payment:** Not directly given, but required for the lease liability and right-of-use asset calculation.
- **Lease Term:** 3 years
- **Incremental Borrowing Rate:** 9%

#### **But**: The main prompt says to prepare the journal entry, assuming Sandhill does not know Carla Vista’s implicit rate (so use the 9%). Initial direct costs of $12,000 are also included, and cash for these initial direct costs is paid.

---

### Step 2: **Journal Entry Format**

You need to **debit**:
- Right-of-Use Asset (for PV of lease payments + initial direct costs)

You need to **credit**:
- Lease Liability (for PV of lease payments)
- Cash (for direct costs paid)

---

### Step 3: **What Amounts to Use?**

You need to enter the amounts. The only missing piece is the PV of lease payments, which is not directly given (lease payment amount is not specified in the screenshot).

#### **If you assume the lease liability is $94,500 (fair value),** then the entries would be:

- **Right-of-Use Asset:** $94,500 (lease liability) + $12,000 (initial direct costs) = **$106,500**
- **Lease Liability:** $94,500
- **Cash:** $12,000

---

### Step 4: **Fill the Journal Entry**

| Date     | Account Titles and Explanation | Debit     | Credit   |
|----------|:------------------------------|:---------:|:--------:|
| 1/1/25   | Right-of-Use Asset            | 106,500   |          |
|          | Lease Liability               |           | 94,500   |
|          | Cash                          |           | 12,000   |

---

#### **Final Entry (to be filled in the boxes):**

- **Right-of-Use Asset:** 106500
- **Lease Liability:** 94500
- **Cash:** 12000

---

#### **How to Enter:**

- In the first box (Right-of-Use Asset, Debit): **106500**
- In the second box (Lease Liability, Credit): **94500**
- In the third box (Cash, Credit): **12000**

---

**Note:** If the lease liability should be based on another amount (e.g., the present value of known lease payments), use that amount. But based on the information in the screenshot, $94,500 (fair value) is a reasonable assumption for the lease liability if no other payment amount is specified.

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