Question

Metlock Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 5 years and requires equal rental payments of $75,477 at the beginning of each year of the lease, starting on the commencement date (December 31, 2019). The equipment has a fair value at the commencement date of the lease of $320,000, an estimated useful life of 5 years, and no estimated residual value. The appropriate interest rate is 9%.

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Prepare Metlock’s 2019 and 2020 journal entries, assuming Metlock depreciates similar equipment it owns on a straight-line basis. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Answer 1

Preparation of Journal Entries
Date	Particulars	Debit (in $)	Credit (in $)
31/12/2019	Right of use Asset /Equipment	$320,000
	Lease liability		$320,000
	(To record lease liability)
31/12/2019	Lease liability	$75,477
	Cash		$75,477
	(To record lease payment)
31/12/2020	Lease Liability	$53,470
	Interest Expense [($320,000 - $75,477) x 9%]	$22,007
	Cash		$75,477
	(To record interest expense)
31/12/2020	Amortisation expense ($320,000 / 5 years)	$64,000
	Accumulated amortisation - Right of use asset		$64,000
	(To record amortisation of the Right of use asset )