Question

On January 1, 2021, Osiris Inc. leased manufacturing equipment from Giza Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Giza. The equipment cost Giza $206,092 and has an expected economic life of five years. Giza expects the residual value at December 31, 2021, to be $25,000. Negotiations led to Osiris guaranteeing a $35,000 residual value.

Equal payments under the lease are $50,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Osiris is aware that Giza used a 5% interest rate when calculating lease payments. (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:
1. & 2. Prepare the appropriate journal entry for Osiris on January 1, 2021 and December 31, 2021, related to the lease.

Answer 1

Date	Account Titles and Explanation	Debit ($)	Credit ($)
January 1, 2021	Right-of-use asset [Refer working note - (1)] Lease payable (To record the lease)	185,525 -	- 185,525
December 31, 2021	Amortization expense [$185,525/ 4 years] Right-of-use asset (To record amortization expense)	46,381 -	- 46,381
December 31, 2021	Interest expense [$185,525 * 5%] Lease payable [Difference] Cash (To record lease payment along with interest)	9,276 40,724 -	- - 50,000

.

# Working note - (1) - Calculation of amount to be recognized as Lease payable -

	Particulars	Formula used	Explanation	Amount ($)
I.	Present value of annual lease payment	p [1 - (1+r)-n / r] p = Annual lease payment = $50,000. r = Interest rate = 5% n = Number of annual lease payment = 4	$50,000 [1 - (1+0.05)-4 / 0.05]	177,298
II.	Present value of residual value	C / ( 1 + r )n C = Residual value = ($35,000-$25,000) = $10,000 r = Interest rate = 5% n= 4 years	$10,000 / (1+0.05)4	8,227
Amount to be recognized as Lease payable			I + II	185,525

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