In: Accounting
High Time Tours leased rock-climbing equipment from Adventures
Leasing on January 1, 2018. High Time has the option to renew the
lease at the end of two years for an additional three years for
$9,000 per quarter. Adventures purchased the equipment at a cost of
$212,218.(FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and
PVAD of $1) (Use appropriate factor(s) from the tables
provided.)
Related Information: | |
Lease term | 2 years (8 quarterly periods) |
Lease renewal option for an additional | 3 years at $9,000 per quarter |
Quarterly lease payments | $16,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter. |
Economic life of asset | 5 years |
Interest rate charged by the lessor | 10% |
Required:
1. Prepare appropriate entries for High Time
Tours from the beginning of the lease through March 31, 2018.
Appropriate adjusting entries are made quarterly.
2. Prepare an amortization schedule for the term
of the lease.
Part 1
Present Value of Lease Payments:
$16,000 x 7.34939 |
117590 |
9000*10.51421*0.82075 |
77666 |
Total present value |
195256 |
i = 2.50% (10% ÷ 4)
Present value of an annuity due of $1: n = 8, i = 2.5% = 7.34939
Present value of an annuity due of $1: n = 12, i = 2.5% = 10.51421
Present value of $1: n = 8, i = 2.5% = 0.82075
date |
General journal |
Debit |
credit |
January 1, 2018 |
Right-of-use equipment |
195256 |
|
Lease liability |
195256 |
||
January 1, 2018 |
Lease liability |
16000 |
|
Cash |
16000 |
||
April 1, 2018 |
Interest expense (2.5%*(195256-16000))) |
4481 |
|
Lease liability (balancing figure) |
11519 |
||
Cash |
16000 |
||
April 1, 2018 |
Amortization expense (195256/20) |
9763 |
|
Right-of-use equipment |
9763 |
Part 2
cash payments |
effective interest |
increase in balance |
balance |
|
1,95,256 |
||||
1 |
16,000 |
16,000 |
1,79,256 |
|
2 |
16,000 |
4,481 |
11,519 |
1,67,737 |
3 |
16,000 |
4,193 |
11,807 |
1,55,931 |
4 |
16,000 |
3,898 |
12,102 |
1,43,829 |
5 |
16,000 |
3,596 |
12,404 |
1,31,425 |
6 |
16,000 |
3,286 |
12,714 |
1,18,710 |
7 |
16,000 |
2,968 |
13,032 |
1,05,678 |
8 |
9,000 |
2,642 |
6,358 |
99,320 |
9 |
9,000 |
2,483 |
6,517 |
92,803 |
10 |
9,000 |
2,320 |
6,680 |
86,123 |
11 |
9,000 |
2,153 |
6,847 |
79,276 |
12 |
9,000 |
1,982 |
7,018 |
72,258 |
13 |
9,000 |
1,806 |
7,194 |
65,065 |
14 |
9,000 |
1,627 |
7,373 |
57,691 |
15 |
9,000 |
1,442 |
7,558 |
50,134 |
16 |
9,000 |
1,253 |
7,747 |
42,387 |
17 |
9,000 |
1,060 |
7,940 |
34,447 |
18 |
9,000 |
861 |
8,139 |
26,308 |
19 |
9,000 |
658 |
8,342 |
17,965 |
20 |
9,000 |
449 |
8,551 |
9,415 |
Effective interest = previous balance * 2.5%
Increase in balance = cash payments – effective interest
Balance = previous balance - increase in balance