Question

On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $434,644 and has an expected economic life of five years. Aqua expects the residual value at December 31, 2018, to be $70,000. Negotiations led to Maywood guaranteeing a $100,000 residual value.

Equal payments under the lease are $140,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Maywood is aware that Aqua used a 5% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. & 2. Prepare the appropriate entries for Maywood on January 1, 2018 and December 31, 2018, related to the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer

The appropriate entries for Maywood:

Date	Particulars	Dr	Cr
January 1, 2018	Right-of-use-asset	$521114
	Lease payable		$521114
	(Being record the lease)
December 31, 2018	Amortization expenses(521114/4)	$130279
	Right-of-use-asset		$130279
	(Being record Amortization expenses for first year )
	Interest expenses(521114*5%)	$26056
	Lease payable	$113944
	Cash (Equal annual payments)		$140000
	(Being annual lease payment )

Working:

PV factor for lease payments                 (3.54595*$140000)    =$496433

Add:PV factor for Cash payment under residual value guarantee(0.82270*$30000)      = $24681

Present value of expected lease payments                                                           = $521114

N=4,i=5%

Cash payment under residual value guarantee =100000-70000 = 30000