Question

On January 1, 2019, Scale Company signed a 6-year lease agreement for equipment. Annual payments are $31,700 at the beginning of each year. At the end of the lease, the equipment will revert to the lessor. The equipment has a useful life of 8 years and has $1800 residual value. At the time of the lease agreement, the equipment has a fair value of $150,000. An interest rate of 12% and double declining method of depreciation is used.

Fill in blanks: amortize the lease for 6 years. (Opening balance is your lease value: PV of all future payments)

	Opening	Interest		Principal	Closing
Year	Balance	Expense	Payment	Payment	Balance
1
2
3
4
5
6

Journalize all the possible entries of year 1 & 2

Answer 1

Answer:

Lease liability = Lease payments x PV annuity factor (12%, 6 years)

= $31,700 x 4.60478

= $145,972

	Opening	Interest		Principal	Closing
Year	Balance	Expense	Payment	Payment	Balance
1	$145,972	0	$31,700	$31,700	$114,272
2	$114,272	$13,713	$31,700	$17,987	$96,285
3	$96,285	$11,554	$31,700	$20,146	$76,139
4	$76,139	$9,137	$31,700	$22,563	$53,575
5	$53,575	$6,429	$31,700	$25,271	$28,305
6	$28,305	$3,397	$31,700	$28,305*	$0

*rounded to $2

• Interest expense = Opening balance x 12%
• Principal payment = Payment - Interest expense
• Closing balance = Opening balance - Principal payment

Journal Entries:

Date	Account title and Explanation	Debit	Credit
Jan 1,2019	Right-of use asset	$145,972
	Lease liability		$145,972
	[To record lease]
Jan 1,2019	Lease liability	$31,700
	Cash		$31,700
	[To record payment of lease]
Dec 31,2019	Interest expense	$13,713
	Lease liability	$17,987
	Lease payable		$31,700
	[To record lease liability]
Dec 31,2019	Amortization Expense	$36,493
	Right-of use asset		$36,493
	[To record amortization of lease]
Jan 1,2020	Lease payable	$31,700
	Cash		$31,700
	[To record payment of lease]
Dec 31,2020	Interest expense	$11,554
	Lease liability	$20,146
	Lease payable		$31,700
	[To record lease liability]
Dec 31,2020	Amortization Expense	$27,370
	Right-of use asset		$27,370
	[To record amortization of lease]

Calculations:

Dec 31,2019:

Rate [Double declining] = (1/8 years) x 2 = 0.125 x 2 = 25%

Amortization expense = $145,972 x 25% = $36,493

Dec 31,2020:

Amortization expense = ($145,972-$36,493) x 25% = $27,370