Question

In: Accounting

High Time Tours leased rock-climbing equipment from Adventures Leasing on January 1, 2018. High Time has...

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.

Solutions

Expert Solution

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


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