Question

In: Accounting

Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1....

Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments on each 1/1 and the first payment of $10,000 is made on 1/1/20x1. The lease also specifies a 3% annual increase in the lease payments. The equipment has a fair value of $100,000 on 1/1/20x1. The expected useful life of the equipment is 10 years with no residual value. The equipment will be returned to Cubs at the end of the lease term. The implicit rate is 10%. The payment for the first year is 10 000(the payments are made on 1.1), then the payments increases every year with 3%.

So far, i know that on 1/1/20x1 for A and B the amount is 36341 USD.

For C and D - 10000 USD.

For F - 2634 USD

For H - 7666 USD

For I - 2634 USD

For J - 10300 USD

For - 1868 USD

I don't know how to calculate the Rental expense and Rou obligation at the end of the both years. (E, G, K, M)

Date Account Name (Debit) Account Name (Credit) Debit Credit
1/1/20X1 ROU assets [A]
Lease obligation [B]
1/1/20X1 Lease obligation [C]
Cash [D]
12/31/20X1 Rental expense [E]
Accrued interest [F]
ROU assets [G]
1/1/20X2 Lease obligation [H]
Accrued interest [I]
Cash [J]
12/31/20X2 Rental expense [K]
Accrued interest [L]
ROU assets [M]

Solutions

Expert Solution

Computaqtion of present value of lease payments:

Date Lease Payment ($) PV Factor @10% Present Value ($)
A B C D=B*C
01-1-20X1                               10,000 1.0000               10,000
01-1-20X2                               10,300 0.9091                 9,364
01-1-20X3                               10,609 0.8265                 8,768
01-1-20X4                               10,927 0.7513                 8,210
Total                               41,836               36,341

Journal entries:

Date Account Name (Debit) Account Name (Credit) Debit ($) Credit ($)
1/1/20X1 ROU assets           36,341
Lease obligation         36,341
1/1/20X1 Lease obligation           10,000
Cash         10,000
12/31/20X1 Rental expense           11,719
Accrued interest           2,634 (36,341-10,000) x 10%)
ROU assets           9,085 (36,341/4 )
1/1/20X2 Lease obligation             7,666
Accrued interest             2,634
Cash         10,300
12/31/20X2 Rental expense           10,953
Accrued interest           1,868 ( 36,341 - 10,000 - 7,666 ) x 10%
ROU assets           9,085 ( 36,341 / 4 )

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