Question

On 31 December 2000, Columbia Inc. entered into an agreement with Scotia Ltd. to lease equipment with a useful life of 6 years. Columbia Inc. will make four equal payments of $134,000 at the beginning of each lease year. Columbia Inc. anticipates that the equipment will have a residual value of $91,200 at the end of the lease, net of removal costs. Columbia Inc. has the option of extending the lease by (1) paying $91,200 to retain the equipment or (2) allowing Scotia Ltd. to remove it. Scotia Ltd.’s implicit interest rate in this lease is 8%. Columbia Inc.’s incremental borrowing rate is 9%. Columbia Inc. depreciates the leased equipment on a straight-line basis. The lease commences on 1 January 2001. Assume that the fair value of the equipment on the open market is greater than the present value of the lease payments. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.)

Required:

1. Prepare a lease liability amortization table for this lease for Columbia Inc. (Round your final answers to the nearest whole dollar amount. Leave no cell blank. Be certain to enter "0" wherever required.)

2. Prepare all entries that Columbia Inc. will record for this lease for 2011 and 2012. (Round your intermediate calculations and final answers to the nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

1. Lease amortization table is below.

Year	Lease liability balance at the beginning of the year (A)	Interest expense for PY (Lease liability o/s*9%) (B)	Yearly payment ('C)	Liability at the end of year (A+B-C)	Priciple portion (C-B)
1	$                                      4,73,193	$                                 -	$              1,34,000	$                  3,39,193	$       1,34,000
2	$                                      3,39,193	$                        30,527	$              1,34,000	$                  2,35,721	$       1,03,473
3	$                                      2,35,721	$                        21,215	$              1,34,000	$                  1,22,936	$       1,12,785
4	$                                      1,22,936	$                        11,064	$              1,34,000	$                               -	$       1,22,936

Note: Calculation of Lease liability

Year	Payments	Discount factor @9% (1/(1+9%)^n)	Present value of payments
0	$ 1,34,000.00	1.0000	$                 1,34,000
1	$ 1,34,000.00	0.9174	$                 1,22,936
2	$ 1,34,000.00	0.8417	$                 1,12,785
3	$ 1,34,000.00	0.7722	$                 1,03,473
	$ 5,36,000.00		$                 4,73,193

2. Journal entries in the books of columbia for the year 2001 and 2002.

Date	Account tittle	Debit	Credit
Jan 1,2001	Right to use	$        4,73,193
	Lease liability		$                 4,73,193
Jan 1,2001	Lease liability	$        1,34,000
	Cash		$                 1,34,000
Dec 31, 2001	Depreciation	$ 1,18,298.37
	Accmulated depreciation		$                 1,18,298
Dec 31, 2001	Interest expense	$           30,527
	Accrued interest		$                     30,527
Jan 1,2002	Lease liability	$        1,03,473
	Accrued interest	$           30,527
	Cash		$                 1,34,000
Dec 31, 2002	Depreciation	$ 1,18,298.37
	Accmulated depreciation		$                 1,18,298
Dec 31, 2002	Interest expense	$           21,215
	Accrued interest		$                     21,215

Depreciation calculation

Depreciation per year = $4,73,193/4 = $118,298