Question

Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments on each 1/1 and the first payment of $10,000 is made on 1/1/20x1. The lease also specifies a 3% annual increase in the lease payments. The equipment has a fair value of $100,000 on 1/1/20x1. The expected useful life of the equipment is 10 years with no residual value. The equipment will be returned to Cubs at the end of the lease term. The implicit rate is 10%.

Date	Account Name (Debit)	Account Name (Credit)	Debit	Credit
1/1/20X1	ROU assets		[A]
		Lease obligation		[B]
1/1/20X1	Lease obligation		[C]
		Cash		[D]
12/31/20X1	Rental expense		[E]
		Accrued interest		[F]
		ROU assets		[G]
1/1/20X2	Lease obligation		[H]
	Accrued interest		[I]
		Cash		[J]
12/31/20X2	Rental expense		[K]
		Accrued interest		[L]
		ROU assets		[M]

Answer 1

	Date	Lease Payment	PV Factor @10%	Present Value
	01-1-20X1	10,000	1	10,000
	01-1-20X2	10,300	0.90909	9,364
	01-1-20X3	10,609	0.82645	8,768
	01-1-20X4	10,927	0.75131	8,210
	Total	41,836		36,341
	Date	Account Name (Debit)	Account Name (Credit)	Debit $	Credit $
	1/1/20X1	ROU assets		36,341
			Lease obligation		36,341
	1/1/20X1	Lease obligation		10,000
			Cash		10,000
	12/31/20X1	Rental expense		11,719
			Accrued interest ( 36,341   - 10,000 ) x 10%		2,634
			ROU assets ( 36,341 / 4 )		9,085
	1/1/20X2	Lease obligation		7,666
		Accrued interest		2,634
			Cash		10,300
	12/31/20X2	Rental expense		10,953
			Accrued interest ( 36,341 - 10,000 - 7,666 ) x 10%		1,868
			ROU assets ( 36,341 / 4 )		9,085