Question

on January 2, 2019, another of Smith’s subsidiaries, Johnson, entered into an operating lease for four years, with semi-annual lease payments as follows: payments 1 to 3 = $25,000; payments 4 to 6 = $30,000; and payments 7 and 8 = $35,000. Payments are to be made on the inception date and every June 30 and December 31 thereafter. The lessor’s interest rate is 6%. Provide the amortization table for the lease and the journal entries required at the inception of the lease and the lease payment on June 30, 2020. The lessee records amortization expense each time a lease payment is made.

Answer 1

Interest rate for six month (6%/2)				3.00%
Period	Payment No.	payment	Discount rate@3%	Present value
0	1	$        25,000	1.00000	$          25,000
1	2	$        25,000	0.97087	$          24,272
2	3	$        25,000	0.94260	$          23,565
3	4	$        30,000	0.91514	$          27,454
4	5	$        30,000	0.88849	$          26,655
5	6	$        30,000	0.86261	$          25,878
6	7	$        35,000	0.83748	$          29,312
7	8	$        35,000	0.81309	$          28,458
8		$                 -	0.78941	$                   -
		Lease liability		$        210,594

Lease amortization table - lessee
Date	Beginning balance of lease payable	Lease payment	Interest expense (beginning balance of lease payable *3% )	Reduction in lease payable (lease payment - interest expense)	Beginning balance of lease payable (beginning balance of lease payable - reduction in lease payable)
Jan 2, 2019	210,594	25,000		25,000	185,594
Jun 30, 2019	185,594	25,000	5,568	19,432	166,162
Dec 31, 2019	166,162	25,000	4,985	20,015	146,147
Jun 30, 2020	146,147	30,000	4,384	25,616	120,531
Dec 31, 2020	120,531	30,000	3,616	26,384	94,147
Jun 30, 2021	94,147	30,000	2,824	27,176	66,971
Dec 31, 2021	66,971	35,000	2,009	32,991	33,981
Jun 30, 2022	33,981	35,000	1,019	33,981	0

Journal entries
Date	General Jornal	Debit	Credit
Jan 2, 2019	Right of use Asset	210,594
	Lease liability		210,594
	(To record the lease)
Jan 2, 2019	Lease liability	25,000
	Cash		25,000
	(to record Lease liability paid)
Jun 30, 2020	Lease expense	30,000
	Lease liability		4,985
	Right of use Asset		25,616
	(To record lease expense)
Jun 30, 2020	Lease liability	30,000
	Cash		30,000
	(to record Lease liability paid)