Question

Elf Leasing purchased a machine for $420,000 and leased it to IGA, Inc. on January 1, 2018. Lease description: Quarterly rental payments $27,408 at beginning of each period Lease term 5 years (20 quarters) No residual value; no BPO Economic life of machine 5 years Implicit interest rate and lessee’s incremental borrowing rate 12% Fair value of asset $420,000 Required: Prepare appropriate entries for both IGA and Elf Leasing from the beginning of the lease through the second rental payment on April 1, 2018. Amortization is recorded at the end of each fiscal year (December 31). (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 amounts.)

Answer 1

Entries in the books of IGA Inc (Lessee)

IGA Inc(Lessee)
Date	Account Titles and Explanation	Ref. No.	Debit	Credit
1-Jan-18	Equipment Leased		$420,000
	Lease Payable			$420,000
	(To record fair value of asset leased)
1-Jan-18	Lease Payable		$27,408
	Cash			$27,408
	(Lease payment made at the beginning of the first quarter)
1-Apr-18	Interest Expense		$11,778
	Lease Payable		$15,630
	Cash			$27,408
	(To record interest expense and lease payment)

Computation of interest expense at the end of first quarter:

Annual interest = 12%

Quarterly interest rate = 12%/4 quarters = 3%

Interest expense = 3% x (420,000 – 27,408) = $11,778

Lease payable = cash payment – interest expense

Lease payable as on Apr 1, 2018 = 27,408 – 11,778 = $15,630

Entries in the books of Elf Leasing (Lessor)

Elf Leasing (Lessor)
Date	Account Titles and Explanation	Ref. No.	Debit	Credit
1-Jan-18	Lease Receivable		$420,000
	Equipment Leased			$420,000
	(To record fair value of asset leased)
1-Jan-18	Cash		$27,408
	Lease Receivable			$27,408
	(To record quarterly lease payment received)
1-Apr-18	Cash		$27,408
	Lease Receivable			$15,630
	Interest Revenue			$11,778
	(To record interest revenue and lease receivable received)