Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Metlock Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2020, is $76,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $24,177.00 to the lessor, beginning on January 1, 2020.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Metlock uses the straight-line depreciation method for all equipment.

Click here to view factor tables.

Prepare all of the journal entries for the lessee for 2020 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 2 decimal places, e.g. 5,265.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	(To record the lease)
1/1/2012/31/20	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	(To record lease liability)
1/1/2012/31/20	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount

Answer 1

Date	General journal	Debit	Credit
Jan 1, 2020	Leased Equipment	$69131.96
	Lease Liability (24177* 2.85941 )		$69131.96
	(to record the lease)
“	Lease Liability	$24177
	Cash		$24177
	(to record lease liability repayment)
Dec 31,2020	Interest Expense (44954.96*5% )	$2247.75
	Lease liability (24177-2247.75)	$21929.25
	Cash		$24177
	(to record interest expense)
Dec 31, 2020	Depreciation Expense	$13826.39
	Accumulated Depreciation ($69131.96/5)		$13826.39
	(to record depreciation)

Note: The leased asset is depreciated over the shorter of the lease term or useful life of asset. Lease term = 3 years and useful life of asset = 5 years. Hence, asset is depreciated over three years.

Computations:

Lease liability to Metlock

Since lease payments are made in advance, annuity due table factors are used to compute the lease liability.

Since the implicit rate of lessor is unknown to lessee, the lease liability is computed using the incremental borrowing rate of 5%.

Also, salvage value is not considered for computation of liability as the same is unguaranteed.

Lease liability = annual rental payment x annuity due at 5% for 3 years

Annual rental payment = $24177

Annuity due factor at 5% for 3-year period = 2.85941

Lease liability = 24177* 2.85941 = $69131.96

Amortization schedule –

period	Beginning balance	Interest	annual rental	principal payment	Liability ending balance
0	$69131.96	-	$24177	$24177	$44954.96
1	$44954.96	$2247.75	24177	21929.25	23025.71
2	23025.71	1151.29	24177	23025.71	0
3	0	0		0	0