Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Shamrock 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 $62,000.
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 $4,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $20,250 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.		Shamrock uses the straight-line depreciation method for all equipment.

Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round answers to 0 decimal places, e.g. 5,265.)

SHAMROCK COMPANY (Lessee) Lease Amortization Schedule
Date		Annual Lease Payment		Interest on Liability		Reduction of Lease Liability		Lease Liability
1/1/20		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
1/1/20		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/21		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/22		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

Prepare all of the journal entries for the lessee for 2020 and 2021 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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,265. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record the lease	enter a debit amount	enter a credit amount
	enter an account title To record the lease	enter a debit amount	enter a credit amount
	(To record the lease)
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	(To record lease payment)
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	(To record interest expense)
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To reverse interest expense	enter a debit amount	enter a credit amount
	enter an account title To reverse interest expense	enter a debit amount	enter a credit amount
	(To reverse interest expense)
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	(To record lease payment)
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	(To record interest expense)
choose a transaction date                                                                      1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)

Answer 1

1. Amortization schedule

The lease is a capital lease because the present value of the minimum lease payments exceeds 90% of the fair value of the asset.

Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
01-01-2020				$57,903*
01-01-2020	$20,250	$0	$20,250	$37,653
01-01-2021	$20,250	$1,883	$18,367	$19,286
01-01-2022	$20,250	$964	$19,286	$0

* Calculation of lease liability

PV of Lease Payments
Lease Payment	20250
No of years	3
Interest rate	5%
PV annuity due Factor @ 5% for 3 years	2.85941
PV of Lease Payments	57903

2. Journal entries

Date	Accounts	Debit	Credit
Jan 01 2020	Right to use Asset	$57,903
	Lease Liability		$57,903
	(To record Liability)
Jan 01 2020	Lease Liability	$20,250
	Cash		$20,250
	(To record lease payments)
Dec 31 2020	Interest Expense	$1,883
	Interest Payable		$1,883
	( To record accrued interest)
	Depreciation Expense*	$19,301
	Accumulated Depreciation		$19,301
	(To record Depreciation Expense)
Jan 01 2021	Interest Payable	$1,883
	Interest Expense		$1,883
	(Reversing the entry)
	Interest Expense	$1,883
	Lease Liability	$18,367
	Cash		$20,250
	(To record lease payment)
Dec 31 2021	Interest Expense	$964
	Interest Payable		$964
	(To record accrued interest)
	Depreciation Expense	$19,301
	Accumulated Depreciation		$19,301
	(To record Depreciation Expense)

* Depreciation = $57,903 / 3 years = $19,301