Question

Riverbed Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $53,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Riverbed’s incremental borrowing rate is 9%. Riverbed is unaware of the rate being used by the lessor. At the end of the lease, Riverbed has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Riverbed uses the straight-line method of depreciation on similar owned equipment.

A)Prepare the journal entries, that Riverbed should record on December 31, 2020.

B)Prepare the journal entries, that Riverbed should record on December 31, 2021.

C)Prepare the journal entries, that Riverbed should record on December 31, 2022.

D)What amounts would appear on Riverbed’s December 31, 2022, balance sheet relative to the lease arrangement?

Answer 1

Answer:

PV of lease payament = $53,000 × 4.23972 = $224,705.15

Answer-A):
Date	General Journal	Debit ($)	Credit ($)
12/31/2020	Leased equipment	224,705.15
	Lease liability		224,705.15
12/31/2020	Lease liability	53,000.00
	Cash		53,000.00
Answer-B):
Date	General Journal	Debit ($)	Credit ($)
12/31/2021	Depreciation expense	32,100.74
	Accumulated depreciation-Capital lease		32,100.74
12/31/2021	Lease liability	37,546.54
	Interest expense	15,453.46
	Cash		53,000.00
Answer-C):
Date	General Journal	Debit ($)	Credit ($)
12/31/2022	Depreciation expense	32,100.74
	Accumulated depreciation-Capital lease		32,100.74
12/31/2022	Lease liability	40,925.72
	Interest expense	12,074.28
	Cash		53,000.00

Date	Annual lease payment	Interest expense @9%	Reduction of lease liability	Lease liability
12/31/2020				224,705.15
12/31/2020	53,000.00		53,000.00	171,705.15
12/31/2021	53,000.00	15,453.46	37,546.54	134,158.61
12/31/2022	53,000.00	12,074.28	40,925.72	93,232.89
12/31/2023	53,000.00	8,390.96	44,609.04	48,623.85
12/31/2024	53,000.00	4,376.15	48,623.85	(0.00)

Answer-D):
RiverBed Steel Company
Balance Sheet
December.31, 2022
Property, Plant and Equipment:
Leased equipment under capital lease	$   224,705.15
Less: Accumulated depreciation-Capital lease	64,201.47
	160,503.68
Current liability:
Lease liability	$     44,609.04
Long-term Liabilies:
Lease liability	$     48,623.85