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In: Accounting
Garza Company enters into a 5 year capital lease as the lease on Jan 1st 2020....
Garza Company enters into a 5 year capital lease as the lease on Jan 1st 2020. The fair value of the asset is $150,000, and the annual lease payments are $33,594 payable each January 1st. Garza uses the straight line method for depreciation. Make the journal entry for the first 2 years.
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| Fair value of Asset | 150000 |
| Total Lease Payment | 167970 |
| Interest Amount | 17970 |
| Calculation of interest rate | ||||
| Let Inerest rate is 6% | ||||
| Capital Lease Accounting – Interest Charges | ||||
| Opening | Interest 6% | Payment | Closing | |
| Year 1 | 1,50,000 | -33,594 | 1,16,406 | |
| Year 2 | 1,16,406 | 6,984 | -33,594 | 89,796 |
| Year 3 | 89,796 | 5,388 | -33,594 | 61,590 |
| Year 4 | 61,590 | 3,695 | -33,594 | 31,692 |
| Year 5 | 31,692 | 1,901 | -33,594 | -1 |
Depreciation = Asset Value / Term = 150000 / 5 = 30,000 per year Depreciation = 150000 / 5 = 30000 per year
| Date | Journal | Debit | Credit | |
| 01-01-2020 | Assets | 150000 | ||
| Lease Liability | 150000 | |||
| 01-01-2020 | Lease Liability | 33594 | ||
| Cash | 33594 | |||
| 31-12-2020 | Depreciation | 30000 | ||
| Accumulated Depreciation | 30000 | |||
| 01-01-2021 | Lease Liability | 26610 | ||
| Interest | 6984 | |||
| Cash | 33594 | |||
| 31-12-2021 | Depreciation | 30000 | ||
| Accumulated Depreciation | 30000 |
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