Question

On January 1, 2021, QuickStream Communications leased telephone equipment from Digium, Inc. Digium’s cash selling price for the equipment is $1,946,047. The lease agreement specifies six annual payments of $460,000 beginning December 31, 2021, and at each December 31 thereafter through 2026. The six-year lease is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase by the higher of (a) the increase in the Consumer Price Index for the preceding year or (b) 3%. The CPI at the beginning of the lease is 130. Digium routinely leases equipment to other firms. The interest rate in these lease arrangements is 11%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: Prepare the appropriate journal entries for QuickStream to record the lease at its beginning date of January 1, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Answer 1

No	Date	General Journal	Debit	Credit
1	January 1,2021	Right of use asset	2,079,259
		Lease payable		2,079,259

Workings:

Year	Annual lease payment	PVF @11%	Present value
1	460,000	0.90090	414,414
2	473,800	0.81162	384,546
3	488,014	0.73119	356,831
4	502,654	0.65873	331,114
5	517,734	0.59345	307,249
6	533,266	0.53464	285,105
Total			2,079,259

Annual lease payment for year 2 = 460,000*103% = 473800

Annual lease payment for year 3 = 473800 *103% = 488014 and so forth