Question

A leesor and lesse enter into a lease agreement whereby an 18 wheeler with a fair of $130,000 and a useful life of five years will be leased for a period of four years. The lease payments will be made at the beginning of each year. The residual value at the end of the lease term is expected to be $20,000. The residual value at the end of the asset’s useful life is expected to be $15,000. At the end of the two years the lessee has the option to purchase the truck for 65,000. The fair market value of the truck is estimated to be 90,000. The lessor requires a rate of return of 12% on his net investment. The lessee can borrow to purchase the truck at a 10% interest rate. The lessee knows the lessor’s implicit rate.

Question

For the lessee

• The capitalized value of the lease is ……………
• The beginning carrying value of liability is………..
• The interest rate to calculate interest is………..
• Make the journal entries for the first year of the lease term

            LEASED TRUCK          

                        CASH  

                        LEASE LIABILITY         

            INTEREST EXPENSE   

                        INTEREST PAYABLE

            AMORTIZATION EXPENSE

                        ACCUM AMORTIZATION

Note: All the details are as provided, nothing is missing. For lease payment you have to calculate based on information provided

Answer 1

Amount of lease payment	$ 26,072	{130,000 - (65,000 x 0.63552) )/3.40183 }
Capitalized value of lease is	$130,000
Beginning Carrying value of liability
Before 1st payment	$130,000
After 1st payment	$103,928	( 130,000 - 26,072 )
The Interest rate to calculate interest is	12%

Journal Entries
Account Titles	Debit $	Credit $
Lease Truck	130,000
Cash		26,072
Lease Liability		103,928
( To record lease including First lease payment )
Interest Expense ( 130,000 - 26,072 ) x 12%	12,471
Interest payable		12,471
( To record accrual of Interest )
Amortization Expense ( 130,000 / 4 )	32,500
Accumulated Amortization		32,500
( To record annual amortization )