Question
In: Accounting
You are the new controller for Banana, Inc.. The company CFO has asked you to develop...
You are the new controller for Banana, Inc.. The company CFO has asked you to develop the appropriate worksheets and then journal entries to support several lease contracts as applied based on the new lease regulations. Your accounting group provided you the following information regarding the lease:
On January 2, 2018, Banana leased equipment, with a fair value of $675,000, under a capital lease calling for seven annual lease payments of $110,000 beginning January 2, 2018, and continuing each December 31st. Banana's incremental borrowing rate on the date of the lease was 8%. However, the lessor's implicit rate, which was known by Banana, was 6%. Provide the amortization table for the lease and the journal entries required for December 31, 2018 and December 31, 2020.
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Expert Solution
| Rate | Interest rate | 6% | ||||||||
| Nper | Number of lease payments | 7 | ||||||||
| Pmt | Annual Lease payment | $110,000 | ||||||||
| Type | Beginning of year payment | 1 | ||||||||
| PV | Present Value of payment | $650,906 | ||||||||
| (Using PV function of excel) | ||||||||||
| Fair Value of assets | $675,000 | |||||||||
| Asset will be reportted at lower of fair value and Present Value of payments | ||||||||||
| For Calculation of interest expense, Use Lower of borrowing rate of lessee and implicit rate of lessor | ||||||||||
| d | AMORTIZATION TABLE | |||||||||
| A | B=6% * Previous Balance | C=A-B | ||||||||
| Date of Payment | Payment No. | Total Payment | Interest expense | Debit to Lease Liability | Balance in Lease Liability | |||||
| Jan2,2018 | 1 | $110,000 | $0 | $110,000 | $540,906 | (650906-110000) | ||||
| Dec 31,2018 | 2 | $110,000 | $32,454 | $77,546 | $463,360 | |||||
| Dec 31,2019 | 3 | $110,000 | $27,802 | $82,198 | $381,162 | |||||
| Dec 31,2020 | 4 | $110,000 | $22,870 | $87,130 | $294,031 | |||||
| Dec 31,2021 | 5 | $110,000 | $17,642 | $92,358 | $201,673 | |||||
| Dec 31,2022 | 6 | $110,000 | $12,100 | $97,900 | $103,774 | |||||
| Dec 31,2023 | 7 | $110,000 | $6,226 | $103,774 | $0 | |||||
| JOURNAL ENTRY FOR LESSEE | ||||||||||
| Date | Account Titles | Debit | Credit | |||||||
| Jan2,2018 | Leased Asset | $650,906 | ||||||||
| Lease Liability | $650,906 | |||||||||
| Jan2,2018 | Lease Liability | $110,000 | ||||||||
| Cash | $110,000 | |||||||||
| Dec31,2018 | Lease Liability | $77,546 | ||||||||
| Interest expense | $32,454 | |||||||||
| Cash | $110,000 | |||||||||
| Depreciation expense | $92,987 | (650906/7) | (Assuming Straight Line Depreciation) | |||||||
| Accumulated Depreciation | $92,987 | |||||||||
| Dec31,2020 | Lease Liability | $87,130 | ||||||||
| Interest expense | $22,870 | |||||||||
| Cash | $110,000 | |||||||||
ekkarill92 answered 2 years ago