Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Sheridan 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 $77,000.

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 $9,000, none of which is guaranteed.

4. The agreement requires equal annual rental payments of $23,907.43 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. Sheridan 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 enter an account title

(to record the lease)

(to record lease liability)

(to record expenses)

Answer 1

	Journal Entries
Date	Accounts title	Debit	Credit
Jan 01 2020	Right to use Asset	$    68,361.15
	Lease Liability		$       68,361.15
	(To record Liability)
Jan 01, 2020	Lease Liability	$    23,907.43
	Cash		$       23,907.43
	(To record lease payments)
31-Dec-20	Interest Expense	$      2,222.69
	Interest Payable		$         2,222.69
	( To record accrued interest)
	Depreciation Expense (68361.15/3)	$    22,787.05
	Accumulated Depreciation - Right-to- Use Asset		$       22,787.05
	(To record Depreciation Expense)

Working:

Lease Liability
PV of Lease Payments
Lease Payment	23907.43
No of years	3
Interest rate	5%
PV annuity due Factor @ 5% for 3 years	2.85941
PV of Lease Payments	$    68,361.15

Lease Amortisation Schedule
Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
01-01-2020				$68,361.15
01-01-2020	$       23,907.43	$           -	$23,907.43	$44,453.72
01-01-2021	$       23,907.43	$2,222.69	$21,684.74	$22,768.98
05-01-2022	$       23,907.43	$1,138.45	$22,768.98	$         0.00