Question

Problem 21A-3 a-d

Marin Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2017. Annual rental payments of $46,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Marin’s incremental borrowing rate is 9%. Marin is unaware of the rate being used by the lessor. At the end of the lease, Marin has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Marin uses the straight-line method of depreciation on similar owned equipment.

Prepare the journal entries, that Marin should record on December 31, 2017.

Prepare the journal entries, that Marin should record on December 31, 2018.

Prepare the journal entries, that Marin should record on December 31, 2019. What amounts would appear on Marin’s December 31, 2019, balance sheet relative to the lease arrangement?

Answer 1

	Present Value Schedule
	Date	Payment	PVF@9%	Present Value
	31-Dec-17	$       46,000	1.0000	$             46,000
	31-Dec-18	$       46,000	0.9174	$             42,202
	31-Dec-19	$       46,000	0.8417	$             38,717
	31-Dec-20	$       46,000	0.7722	$             35,520
	31-Dec-20	$       46,000	0.7084	$             32,588
	31-Dec-20	$         5,000	0.7084	$ 3,542
		Total		$          1,98,569
	Amortisation Schedule
	Date	Opening	Installment	Principle	Interest	Closing
	31-Dec-17	$   1,98,569	$         46,000	$             46,000	$                    -	$ 1,52,569
	31-Dec-18	$   1,52,569	$         46,000	$             32,269	$           13,731	$ 1,20,300
	31-Dec-19	$   1,20,300	$         46,000	$             35,173	$           10,827	$     85,128
	31-Dec-20	$       85,128	$         46,000	$             38,339	$             7,661	$     46,789
	31-Dec-20	$       46,789	$         46,000	$             41,789	$             4,211	$       5,000
	31-Dec-20	$         5,000	$           5,000	$                5,000	$                    -	$              -
	Journal Entry:
	Date	Accounts			Dr Amount	Cr Amount
	31-Dec-17	Asset A/c			$       1,98,569
			To Vendor A/c			$ 1,98,569
		(being lease recorded)
	31-Dec-17	VendorA/c			$           46,000
			To Cash A/c			$     46,000
		(being first payment made)
	31-Dec-18	Vendor A/c			$           32,269
		Interest A/c			$           13,731
			To Cash A/c			$     46,000
		(being lease payment made along with Interest)
	31-Dec-19	Vendor A/c			$           35,173
		Interest A/c			$           10,827
			To Cash A/c			$     46,000
		(being lease payment made along with Interest)
	Balance Sheet Amounts:
	Vendor A/c		Liability		$           85,128
	Asset A/c		Asset		$       1,41,835