Give step-by-step solution with explanation and final answer:(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. Un

Question

Give step-by-step solution with explanation and final answer:(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 —
—
—

VIPSolutions · Accepted Answer

Let's break down the steps to solve the problem and compute the correct journal entry.

### **Step 1: Identify Lease Payments and Discount Rate**
- Lease term: 3 years (payments on December 31, beginning December 31, 2025)
- Annual rental payments: Not directly provided—**need to find Present Value (PV) of lease payments**
- Incremental borrowing rate (discount rate): **9%**
- Initial direct costs: **$12,000**

### **Step 2: Calculate Present Value of Lease Payments**
- The lease is for 3 years; the machine has no residual value.
- Fair value of the machine: $94,500.
- Since the lease transfers ownership and is for the entire useful life, it is a finance lease.
- The PV of lease payments (using fair value as a proxy since transfer of ownership): **$94,500**

### **Step 3: Compute Right-of-Use Asset**
- Right-of-Use Asset = PV of Lease Payments + Initial Direct Costs
- = $94,500 + $12,000 = **$106,500**

### **Step 4: Journal Entry at Lease Commencement**
- **Debit** Right-of-Use Asset for $106,500
- **Credit** Lease Liability for $94,500 (PV of lease payments)
- **Credit** Cash for $12,000 (initial direct costs paid)

---

## **Final 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  |

---

**Explanation:**  
- The Right-of-Use Asset is debited for the sum of the present value of lease payments and the initial direct costs.
- Lease Liability is credited for the present value of lease payments.
- Cash is credited for the payment of the initial direct costs.

**Fill in the blanks as:**
- Right-of-Use Asset: **Debit 106500**
- Lease Liability: **Credit 94500**
- Cash: **Credit 12000**

✨ VIPSolutions

Question:

Final Answer:

📢 Instructions:

Study Help, Fast Answers

✨ VIPSolutions

Question:

Final Answer:

📢 Instructions:

Related Answers

Study Help, Fast Answers