Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Nash Company. The following information relates to this agreement.

The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2017, is $79,300.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,300, none of which is guaranteed.
4.		Nash Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $940 to Rocky Mountain Insurance Company for insurance and (2) $1,490 to Laclede County for property taxes.
5.		The agreement requires equal annual rental payments of $17,930.41 to the lessor, beginning on January 1, 2017.
6.		The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.
7.		Nash Company uses the straight-line depreciation method for all equipment.
8.Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.) Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 15.25.)		Nash uses reversing entries when appropriate.

Answer 1

Annual rental	$17,930.41
Pv of annuity due n= 5, I =10%	4.16986
Pv of minimum lease Payments	$74,767.30

Amortization schedule

Date	Annual lease Payment	Interest on unpaid obligation 10%	Reduction on lease obligation	Balance of lease obligation
01-01-17				$74,767.30
01-01-17	17930.41		$17,930.41	$56,836.89
01-01-18	17930.41	$5,683.69	$12,246.72	$44,590.17
01-01-19	17930.41	$4,459.02	$13,471.39	$31,118.78
01-01-20	17930.41	$3,111.88	$14,818.53	$16,300.24
01-01-21	17930.41	$1,630.17	$16,300.24	$0.00

Journal entries

Date	Particulars	Debit	credit
2017
Jan-01	Leased Equipment - capital leases	$74,767.30
	Lease liability		$74,767.30
	(To record lease liability)
Jan-01	Lease liability	17930.41
	cash		17930.41
	(Payment of lease liability)
	Insurance expense	$940
	cash		$940
	(Payment of insurance expense)
	Property taxes	$1,490
	cash		$1,490
	(Payment of property tax)
31-Dec	Interest expense	$5,683.69
	Interest Payable		$5,683.69
	(To record interest expense due)
	Depreciation expense	$14,953.46
	Accumulated depreciation - capital lease		$14,953.46
	[74767.30/5]
	(To record depreciation)
2009
Jan-01	Interest expense	$5,683.69
	Interest Payable		$5,683.69
	(To record interest expense due)
Jan-01	Interest expense	$5,683.69
	Lease liability	$12,246.72
	cash		$17,930.41
	(Payment of lease amount)
	Insurance expense	$940
	cash		$940
	(To record Payment of insurance expense)
	Property taxes	$1,490
	cash		$1,490
	(To record payment of property tax)
31-Dec	Interest expense	$4,459.02
	Interest Payable		$4,459.02
	(To record interest due)
	Depreciation expense	$14,953.46
	Accumulated depreciation - capital lease		$14,953.46
	[74767.30/5]
	(To record depreciation)