Question

On January 1, 2021, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 6%. The contract calls for four rent payments of $12,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $94,000 and were expected to have a useful life of five years with no residual value. Both firms record amortization and depreciation semiannually. (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.)

Required:

1. Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease.

2. Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first year of the lease.

Answer 1

Nath-Langstrom Services Inc

Journal Entries

Date	Account	Debit ($)	Credit ($)
01-Jan-21	Right of use asset (see working note 1 below)	44,605
	Lease Liability		44,605
	(Entry to record lease liability)
30-Jun-21	Interest Expense (see working note 2 below)	1,338
	Lease Liability	10,662
	Cash		12,000
	(Entry to record interest expense and lease payment)
30-Jun-21	Amortization Expense	10,662
	Right of use asset		10,662
	(Entry to record amortization expense)
31-Dec-21	Interest Expense (see working note 2 below)	1,018
	Lease Liability	10,982
	Cash		12,000
	(Entry to record interest expense and lease payment)
31-Dec-21	Amortization Expense	10,982
	Right of use asset		10,982
	(Entry to record amortization expense)

Working Notes:

1	Present Value of lease payments	=12000 x 3.7171*
		=44,605
	* Present value of an annuity of $1: n = 4, i = 3%.
2	Amortization Schedule
Date	Payment	Interest @ 3% on outstanding balance	Decrease in outstanding liability	Outstanding liability
01-Jan-21	0	0	0	44,605
30-Jun-21	12,000	1,338	10,662	33,943
31-Dec-21	12,000	1,018	10,982	22,962

Computer World Leasing

Journal Entries

Date	Account	Debit ($)	Credit ($)
30-Jun-21	Cash	12,000
	Lease Revenue		12,000
	(Entry to record amount received from lessee)
30-Jun-21	Depreciation Expense	9,400
	Accumulated Depreciation		9,400
	=((94000/5)/2)
	(Entry to record semi annual depreciation expense)
31-Dec-21	Cash	12,000
	Lease Revenue		12,000
	(Entry to record amount received from lessee)
31-Dec-21	Depreciation Expense	9,400
	Accumulated Depreciation		9,400
	=((94000/5)/2)
	(Entry to record semi annual depreciation expense)