Question
In: Accounting
On January 1, 2017, Cullumber Corporation signed a 5-year noncancelable lease for a machine. The terms...
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. |
Solutions
Expert Solution
| 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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