Question

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]

Answer 1

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 )