Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Vaughn 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, 2020, is $76,000.
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 $7,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $24,177.00 to the lessor, beginning on January 1, 2020.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Vaughn uses the straight-line depreciation method for all equipment.

Prepare all of the journal entries for the lessee for 2020 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. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 2 decimal places, e.g. 5,265.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	(To record the lease)
1/1/2012/31/20	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	(To record lease liability)
1/1/2012/31/20	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount

Answer 1

	1) Lessee Accounting: Vaughn Company
	The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest or incremental borrowing rate(if implicit rate is not known)(i.e., 5% p.a. in this case) at lease commencement date . The lease liability is accounted for by the interest method subsequently and the ROU asset is subject to depreciation on the straight-line basis over the lease term of 3 year.
	The leasee shall record the lease liability (Present value of Lease payment & guaranteed residual value) & right in use asset in the given case.
A	Year	Payments (Cash flows)	Present Value Factor @5%p.a.	Discounted Cash flows/ Present value
	1	$                                                                                  24,177.00	1	$                         24,177.00
	2	$                                                                                  24,177.00	0.95238	$                         23,025.71
	3	$                                                                                  24,177.00	0.90703	$                         21,929.25
	Total	$                                                                                        72,531		69,131.97
B	Lease Amortisation Schedule:
Year	Opening lease liability	Lease Payments	Interest Expense @ 5% per annum	Closing lease liability
1	$                            69,131.97	$                                                                                  24,177.00	$                 2,247.75	$                         47,202.71
2	$                            47,202.71	$                                                                                  24,177.00	$                 1,151.29	$                         24,177.00
3	$                            24,177.00	$                                                                                  24,177.00	$                       (0.00)	$                                  (0.00)
	Note: As the lease payment is being made at the beginning of the month, interest will be calculated on Opening lease liability less lease payment .
C	Right in use asset Schedule:
	Year	Opening	Depreciation	Closing
	1	$                                                                                  69,131.97	$               23,043.99	$                         46,087.98
	2	$                                                                                  46,087.98	$               23,043.99	$                         23,043.99
	3	$                                                                                  23,043.99	$               23,043.99	$                                         -
D		In the books of Leasee-Vaughn
		Journal Entries
	Year	Particulars	Debit	Credit
	01-01-20	ROU Asset A/C	$               69,131.97
		To Lease liabilty A/C		$                         69,131.97
		(Being initially recognise the lease-related asset and liability .)
	01-01-20	Lease liabilty A/C	$               24,177.00
		To Cash A/C		$                         24,177.00
		(To record lease payment)
	31-12-20	Interest expense A/C	$                 2,247.75
		To Lease liabilty A/C		$                            2,247.75
		(Being interest expense & lease liablity paid)
	31-12-20	Amortisation expense A/C	$               23,043.99
		To ROU Asset A/C		$                         23,043.99
		(To record depreciation expense on the ROU asset)
		($69131.97/3 year)
	31-12-20	Profit & Loss A/C	$               25,291.74
		To Interest expense A/C		$                            2,247.75
		To Depreciation expense A/C		$                         23,043.99
		(Being amount transfer)
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