Question

On January 1, 2020, Riverbed Animation sold a truck to Peete Finance for $46,000 and immediately leased it back. The truck was carried on Riverbed’s books at $42,000. The term of the lease is 3 years, there is no bargain purchase option, and title does not transfer to Riverbed at lease-end. The lease requires three equal rental payments of $14,500 at the end of each year (first payment on January 1, 2021). The appropriate rate of interest is 6%, the truck has a useful life of 5 years, and the residual value at the end of the lease term is expected to be $14,000, none of which is guaranteed.

Prepare Riverbed’s 2020 journal entries.

Answer 1

Sol :-

	Annual Rental Payment	14500
	P.V. of an annuity for n = 3 & I =6%	2.673
	P.V. of rental Payments =	38,758.50
Year	Annual Lease Expense	Interest @ 6% on Outstanding Balance (Col.2-Col.3)	Reduction in Balance (Col.2 -Col.3)	Outstanding Balance
1				38758.5
1	14500	2,325.51	12,174.49	26,584.01
Date	Account Title expense and Explanation	Debit	Credit
1/1/2017	Cash	46,000
	Trucks		42000
	Gain on disposal of plan Assets		4000
	(To record sales of Truck)
1/1/2017	Right to use Assets	38,758.50
	Lease Liability		38,758.50
	(To record Lease Liability )
12/31/2017	Lease expense	14,500
	Lease Liabilty		2325.51
	Right to use Assets		12174.49