Sandhill Company leases a building to Teal Mountain, Inc. on January 1, 2025. The following facts pertain to the lease agreement. 1. The lease term is 5 years, with equal annual rental payments of $3,539 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $17,800, a book value to Sandhill of $10,800, and a useful life of 6 years. 4. At the end of the lease term, Sandhill and Teal Mountain expect there to be an unguaranteed residual value of $3,730. 5. Sandhill wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Teal Mountain was unaware of the implicit rate used in the lease by Sandhill and has an incremental borrowing rate of 9%. Click here to view factor tables. How would Sandhill (lessor) and Teal Mountain (lessee) classify this lease? Sandhill would classify the lease as a Teal Mountain would classify the lease as a lease. lease. How would Sandhill initially measure the lease receivable, and how would Teal Mountain initially measure the lease liability and right- of-use asset? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places, e.g. 5,275.) Lease receivable Sandhill $ Present value of rental payments $ Lease liability/Right-of-use asset $ Teal Mountain
Sandhill Company leases a building to Teal Mountain, Inc. on January 1, 2025. The following facts pertain to the lease agreement. 1. The lease term is 5 years, with equal annual rental payments of $3,539 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $17,800, a book value to Sandhill of $10,800, and a useful life of 6 years. 4. At the end of the lease term, Sandhill and Teal Mountain expect there to be an unguaranteed residual value of $3,730. 5. Sandhill wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Teal Mountain was unaware of the implicit rate used in the lease by Sandhill and has an incremental borrowing rate of 9%. Click here to view factor tables. How would Sandhill (lessor) and Teal Mountain (lessee) classify this lease? Sandhill would classify the lease as a Teal Mountain would classify the lease as a lease. lease. How would Sandhill initially measure the lease receivable, and how would Teal Mountain initially measure the lease liability and right- of-use asset? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places, e.g. 5,275.) Lease receivable Sandhill $ Present value of rental payments $ Lease liability/Right-of-use asset $ Teal Mountain
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Sandhill Company leases a building to Teal Mountain, Inc. on January 1, 2025. The following facts pertain to the lease agreement.
1.
The lease term is 5 years, with equal annual rental payments of $3,539 at the beginning of each year.
2.
Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a
specialized nature.
3.
The building has a fair value of $17,800, a book value to Sandhill of $10,800, and a useful life of 6 years.
At the end of the lease term, Sandhill and Teal Mountain expect there to be an unguaranteed residual value of $3,730.
4.
5.
Sandhill wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Teal Mountain was unaware
of the implicit rate used in the lease by Sandhill and has an incremental borrowing rate of 9%.
Click here to view factor tables.
How would Sandhill (lessor) and Teal Mountain (lessee) classify this lease?
Sandhill would classify the lease as a
Teal Mountain would classify the lease as a
lease.
lease.
How would Sandhill initially measure the lease receivable, and how would Teal Mountain initially measure the lease liability and right-
of-use asset? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal
places, e.g. 5,275.)
Lease receivable
Sandhill
$
Present value of rental payments
$
Lease liability/Right-of-use asset
$
Teal Mountain
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