Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Metlock Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2017, is $62,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $4,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $20,250 to the lessor, beginning on January 1, 2017.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Metlock uses the straight-line depreciation method for all equipment.

(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.

(b) Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31

Answer 1