Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Windsor 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 $59,000.
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 $19,211 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.		Windsor uses the straight-line depreciation method for all equipment.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

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.)

WINDSOR COMPANY (Lessee) Lease Amortization Schedule
Date		Annual Lease Payment		Interest on Liability		Reduction of Lease Liability		Lease Liability
1/1/20
1/1/20
1/1/21
1/1/22

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
	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)
	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)
	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)
	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)
	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)
	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)
	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)
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

Calculation of present value of lease payment
annual rental payment = 19211
Present value annuity factor @ 5 % for 3 year= 2.85941
present value of lease payment = 19211*2.85941 = 54932
Date	Annual lease payment	interest on liability @5%	reduction of lease liability	Lease liability
01-01-2020				54932
01-01-2020	19211	0	19211	35721
01-01-2021	19211	1786	17425	18296
01-01-2022	19211	915	18296	0
	57633	2701	54932
explanation
interest on liability = lease liability*5%
reduction of lease liability = annual lease payment-interest

Date	Particulars	Debit	Credit
1-1-2020	Right of lease asset	$54,932
	Lease liability		$54,932
	(being to record the recognition of lease)
1-1-2020	Lease liability	$19,211
	cash		$19,211
	(being to record the first lease payment)
31-12-2020	Interest expense	$1,786
	Lease liability		$1,786
	(being to record interest expense)
31-12-2020	Amortization expense(54,932/3)	$18,311
	Right of use asset		$18,311
	(being to record amortization of right of use asset)
1-1-2021	Lease liability	$1,786
	Interest expense		$1,786
	(being to revert interest expense)
1-1-2021	Lease liability	$17,425
	Interest expense	$1,786
	cash		$19,211
	(being to record the lease payment)
31-12-2021	Interest expense	$915
	Lease liability		$915
	( being to record interest expense)
31-12-2021	Amortization expense	$18,311
	Right of use asset		$18,311
	(being to record amortization of right of use asset)