Question

The Balance Sheet of the Illini as of 12/31/20X0:

Assets Current Assets: Cash 1,500,000 Accounts receivable, net 18,000 Inventory 50,000 Total current assets 1,568,000 Equipment 90,000 Goodwill 20,000 Total assets $1,678,000

Liabilities and shareholders' equity Shareholders' equity: Common stock, 20,000 shares outstanding, $1 par 20,000 Additional paid-in capital 280,000 Retained earnings 1,378,000 Total shareholders' equity 1,678,000 Total liabilities and shareholders' equity 1,678,000

Note that all additional paid-in capital (APIC) sub accounts (e.g., APIC-options and APIC-treasury stock), if any, are tracked in the “Additional paid-in capital” account on the Balance Sheet.

2.2 Part 1 For all the following lease transactions, if Illini needs to depreciate the leased equipment, use "depreciation expense." If the lease classification is operating lease, use "rental expense" for all related expenses. Illini leases equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments of $36,000 on each 1/1 and beginning 1/1/20x1. The annual lease payment includes a yearly $1,000 maintenance fee paid to Cubs for providing relevant maintenance services on the equipment. Illini has the option to buy the equipment at the end of the lease term (i.e., 12/31/20x4) for $20,000 when the fair value of the equipment is expected to be $60,000. The expected useful life of the equipment is five years with no residual value. The implicit rate is 10%.

Date	Account Name		Debit	Credit
1/1/20x1	ROU assets		[A]
		Lease obligation		[B]
1/1/20x1	Lease obligation		[C]
	Prepaid Maintenance		[D]
		Cash		[E]
12/31/20x1	Maintenance expense		[F]
		Prepaid Maintenance		[G]
12/31/20x1	Interest expense		[H]
		Accrued interest		[I]
12/31/20x1	Depreciation expense		[J]
		ROU assets		[K]
1/1/20x2	Lease obligation		[L]
	Accrued interest		[M]
	Prepaid Maintenance		[N]
		Cash		[O]
12/31/20x2	Maintenance expense		[P]
		Prepaid Maintenance		[Q]
12/31/20x2	Interest expense		[R]
		Accrued interest		[S]
12/31/20x2	Depreciation expense		[T]
		ROU assets		[U]

Answer 1

Date	Account Name	Debit	Credit
1.1.2001	ROU Assets	$ 144,000.00
	Lease Obligation		$ 144,000.00
1.1.2001	Lease Obligation	$   36,000.00
	Prepaid Maintenance	$     1,000.00
	Cash		$   37,000.00
12.31.2001	Maintenance Expense	$     1,000.00
	Prepaid Maintenance		$     1,000.00
12.31.2001	Interest Expense	$   11,412.00
	Accrued Interest		$   11,412.00
12.31.2001	Depreciation Expense	$   28,800.00
	ROU Assets		$   28,800.00
1.1.2002	Lease Obligation	$   36,000.00
	Accrued Interest	$   11,412.00
	Prepaid Maintenance	$     1,000.00
	Cash		$   48,412.00
12.31.2002	Maintenance Expense	$     1,000.00
	Prepaid Maintenance		$     1,000.00
12.31.2002	Interest Expense	$     8,953.00
	Accrued Interest		$     8,953.00
12.31.2002	Depreciation Expense	$   28,800.00
	ROU Assets		$   28,800.00