Question

Scape Corp. manufactures telephony equipment. Scape leased equipment to User, Inc. on January 1, 2018. Scape produced the equipment at a cost of $5,100,000. Lease description: Quarterly rental payments $464,353 at beginning of each period Lease term 6 years (24 quarters) No residual value; no BPO Economic life of equipment 6 years Implicit interest rate and lessee’s incremental borrowing rate 12% Fair value of asset $8,100,000 Required: Prepare appropriate entries for both User and Scape from the beginning of the lease through the second rental payment on April 1, 2018. Depreciation and amortization are recorded at the end of each fiscal year (December 31).

Answer 1

1.)	Journal Entries
	In the Books of Scape Ltd
Date	Particulars	Dr/Cr.	Dr ($)	Cr ($)
1-Jan-18	Bank A/c	Dr	464,353
	To Lease Income	Cr		464,353
	(Being lease payment received from the user)
1-Apr-18	Bank A/c	Dr	464,353
	To Lease Income	Cr		464,353
	(Being lease payment received from the user)
1-Jul-18	Bank A/c	Dr	464,353
	To Lease Income	Cr		464,353
	(Being lease payment received from the user)
1-Oct-18	Bank A/c	Dr	464,353
	To Lease Income	Cr		464,353
	(Being lease payment received from the user)
31-Dec-18	Depreciation A/c	Dr	850,000
	To Plant, Property and Equipment	Cr		850,000
	(Being Depreciation charged for 1 year)
2.)	Journal Entries
	In the Books of User
Date	Particulars	Dr/Cr.	Dr ($)	Cr ($)
1-Jan-18	Lease Rent A/c	Dr	464,353
	To Bank A/c	Cr		464,353
	(Being lease payment paid)
1-Apr-18	Lease Rent A/c	Dr	235,284
	Finance Cost A/c	Dr	229,069
	To Bank A/c	Cr		464,353
	(Being lease payment paid)
1-Jul-18	Lease Rent A/c	Dr	242,342
	Finance Cost A/c	Dr	222,011
	To Bank A/c	Cr		464,353
	(Being lease payment paid)
1-Oct-18	Lease Rent A/c	Dr	249,612
	Finance Cost A/c	Dr	214,741
	To Bank A/c	Cr		464,353
	(Being lease payment paid)

Workings

Quarter	Fair Value (a)	Interest @ 12% (b)	Lease Payment (c)	Balance (d=a+b-c)	Lease Rent (e=c-b)	Finance Cost (f=b)
1	-	-	464,353	(464,353)	464,353	-
2	7,635,647	229,069	464,353	7,400,363	235,284	229,069
3	7,400,363	222,011	464,353	7,158,021	242,342	222,011
4	7,158,021	214,741	464,353	6,908,409	249,612	214,741

In the 1st quarter, Fair Value shall be NIL as payments are made in advance

In 2nd quarter, Fair Value shall be 8,100,000 less 464,353