Question

On January 2, 20X1, Elsee Co. leased equipment from Grant, Inc. Lease payments are $100,000, payable annually every December 31 for twenty years. Title to the equipment passes to Elsee at the end of the lease term. The lease is noncancellable.

The equipment has a $750,000 carrying amount on Grant’s books. Its estimated economic life was twenty-five years on January 2, 20X1.

The rate implicit in the lease, which is known to Elsee, is 10%. Elsee’s incremental borrowing rate is 12%.

Elsee uses the straight-line method of depreciation.

  

The rounded present value factors of an ordinary annuity for twenty years are as follows:

  

12%	7.5
10%	8.5

  

Required:

Prepare the necessary journal entries to be recorded by Elsee for:

  

Entering into the lease on January 2, 20X1.
  

Account Name	Debit	Credit

  

Making the lease payment on December 31, 20X1.

  

Account Name	Debit	Credit

  
Expenses related to the lease for the year ended December 31, 20X1.
  

Account Name	Debit	Credit

  
Making the lease payment on December 31, 20X2.
  

Account Name	Debit	Credit

  

Answer 1

Leased amortization schdeule
Year	Annual Lease Payment	PVIF@10%	Present value	Interest	Depreciation on Lease
0		1
20	100000	0.909090909	90909.0909	9090.90909	42567.8186
19	100000	0.826446281	82644.6281	17355.3719	42567.8186
18	100000	0.751314801	75131.4801	24868.5199	42567.8186
17	100000	0.683013455	68301.3455	31698.6545	42567.8186
16	100000	0.620921323	62092.1323	37907.8677	42567.8186
15	100000	0.56447393	56447.393	43552.607	42567.8186
14	100000	0.513158118	51315.8118	48684.1882	42567.8186
13	100000	0.46650738	46650.738	53349.262	42567.8186
12	100000	0.424097618	42409.7618	57590.2382	42567.8186
11	100000	0.385543289	38554.3289	61445.6711	42567.8186
10	100000	0.350493899	35049.3899	64950.6101	42567.8186
9	100000	0.318630818	31863.0818	68136.9182	42567.8186
8	100000	0.28966438	28966.438	71033.562	42567.8186
7	100000	0.263331254	26333.1254	73666.8746	42567.8186
6	100000	0.239392049	23939.2049	76060.7951	42567.8186
5	100000	0.217629136	21762.9136	78237.0864	42567.8186
4	100000	0.197844669	19784.4669	80215.5331	42567.8186
3	100000	0.17985879	17985.879	82014.121	42567.8186
2	100000	0.163507991	16350.7991	83649.2009	42567.8186
1	100000	0.148643628	14864.3628	85135.6372	42567.8186
		8.51356372	851356.372	1148643.63
Date	Account Title & explanation		Debit	Credit
			Amount in $	Amount in $
January 2, 20X1	Leased Asset(Equipment)		851356.372
		Lease Payable		851356.372
	To record the inception of lease
	OR As per annuity given in the question it could be following
January 2, 20X1	Leased Asset(Equipment)		850000
		Lease Payable		850000
	To record the inception of lease
December 31, 20X1	Lease Payable		14864.36
	Interest expense(on Lease Payable)		85135.64
		Cash		100000
	To record the annual payment towards lease
December 31, 20X1	Lease Amortization		42567.8186
		Leased Asset(Equipment)		42567.8186
	To record the Lease amortization expense
December 31, 20X2	Lease Payable		16350.80
	Interest expense(on Lease Payable)		83649.20
		Cash		100000
	To record the annual payment towards lease
Note : There exists alternative solution in which leased amortization schedule is prepared in
discount model. It means the years will be reversed. For instance the year 20 will become year 1
and year 19 will year 2. It would change the interest & Lease Payable amount in the journal entries.
Thank You