Question

On January 1, 2017, Cullumber Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Cullumber to make annual payments of $8,200 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $5,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Cullumber uses the straight-line method of depreciation for all of its plant assets. Cullumber’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

The present value of the minimum lease payments is:? Prepare all necessary journal entries for Cullumber for this lease through January 1, 2018.

Answer 1

Answer
Present value of the minimum lease payments = 8200*4.1024456 = $33640
Date	Account Title	Debit	Credit
January 1, 2017	Leased Equipment	$     33,640
	Lease Liability		$     33,640
January 1, 2017	Lease Liability	$       8,200
	Cash		$       8,200
December 31, 2017	Depreciation Expense	$       6,728		33640/5
	Accumulated Depreciation - Capital Leases		$       6,728
December 31, 2017	Interest Expense	$       2,798		(33640-8200)*11%
	Interest Payable		$       2,798
January 1, 2018	Lease Liability	$       5,402
	Interest Payable	$       2,798
	Cash		$       8,200
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