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In: Accounting

AEK Company purchased a computerized machine on January 1, 2019, for $2,800,000 for the purpose of...

AEK Company purchased a computerized machine on January 1, 2019, for $2,800,000 for the purpose of leasing it. The machine was expected to have an seven-year life from January 1, 2019, to have no salvage value, and to be depreciated on a straight- line basis. On January 1,2019, AEK leases the machine to U-Life Company at a total rental of $1,500,000, payable in four annual installments in the following acceleration pattern; 15% in the first two years, 25% in the third year and 45% in the last year. The lease payment begins on the lease signing contract date. In addition to the rent, U-Life is required to pay annual executory cost of $25,000 to cover unusual repairs and insurance. The lease does not qualify as capital lease for reporting purposes.

Required: Provide all necessary entries to record the lease transactions for 2019 and 2022 on the books of

  1. AEK Company
  2. U-Life Company
  1. AEK Company’s Book.

Date

Account Title

Debit

Credit

2019

Jan.1

Dec. 31

2022

Jan.1

  1. U-Life Company’s Book.

Date

Account Title

Debit

Credit

2019

Jan.1

2022

Jan.1

Solutions

Expert Solution

Step: 1 Calculation of amount of lease to be paid

Let Lease amount be then. it is given that AEK leases the machine to U-Life Company at a total rental of $1,500,000, payable in four annual installments in the following acceleration pattern; 15% in the first two years, 25% in the third year and 45% in the last year. Hence

= 1+ (115%) +1 + (115%) + 1 + (125%) + 1+ (145%) = $1500000

=1.15 + 1.15 + 1.25 + 1.45 = $1500000

= 5 = $1500000

= = $1500000/5

= = $ 300000

Depreciation calculation
Machine value- $2800000
life of machine -7 years
slm method applied

formula- total value-scrap value/life

=$2800000-0/7years

=$400000 per year

ekkarill92 answered 2 years ago
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