Question

Accounting for Leases

On July 1, 2017, Shroff Company leased a warehouse building under a 15-year lease agreement. The lease requires quarterly lease payments of $6,000. The first lease payment is due on September 30, 2017. The lease was reported as a capital lease using a 6% annual interest rate.

Required
a. Prepare the journal entry to record the initial signing of the lease on July 1, 2017.
(Use a financial calculator or Excel to compute. Round answer to the nearest whole number.)

Date	Description	Debit	Credit
07/01/2017	Answer

Answer	Answer
	Answer

Answer

Answer

b. Prepare the journal entries that would be necessary on September 30 and December 31, 2017.
(Use rounded answer from above for subsequent calculations. Round your answers to the nearest dollar.)

Date	Description	Debit	Credit
09/30/2017	Answer

Answer	Answer
	Answer

Answer	Answer
	To record depreciation expense.
09/30/2017	Answer

Answer	Answer
	Interest expense	Answer	Answer
	Answer

Answer	Answer
	To record lease payment.
12/31/2017	Answer

Answer	Answer
	Answer

Answer	Answer
	To record depreciation expense.
12/31/2017	Answer

Answer	Answer
	Interest expense	Answer	Answer
	Answer

Answer	Answer
	To record lease payment.

c. Post the entries from parts a and b in their appropriate T-accounts.

Cash (A)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Leased Asset (A)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Accumulated Depreciation (XA)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Lease Liability (L)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Interest Expense (E)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Depreciation Expense (E)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

d. Prepare a financial statement effects template to show the effects of the entries from parts a and b on the balance sheet and income statement.

Balance Sheet Transaction Cash Asset + Noncash Assets - Contra-Assets = Liabilities + Contrib. Capital + Earned Capital 7/1/17 Signed a capital lease $Answer + $Answer - $Answer = $Answer + $Answer + $Answer 9/30/17 Depreciation on leased asset Answer + Answer - Answer = Answer + Answer + Answer 9/30/17 Made quarterly lease payment Answer + Answer - Answer = Answer + Answer + Answer 12/31/17 Depreciation on leased asset Answer + Answer - Answer = Answer + Answer + Answer 12/31/17 Made quarterly lease payment Answer + Answer - Answer = Answer + Answer + Answer

Income Statement Revenue - Expenses = Net Income $Answer - $Answer = $Answer Answer - Answer = Answer Answer - Answer = Answer Answer - Answer = Answer Answer - Answer = Answer

e. Redo parts a and b assuming that the lease is reported as an operating lease.
(If no entry is required, enter "No entry" for the debit and credit account name.)

Date	Description	Debit	Credit
7/1/2017	Answer

Answer	Answer
	Answer

Answer	Answer
9/30/2017	Answer

Answer	Answer
	Answer

Answer	Answer
12/31/2017	Answer

Answer	Answer
	Answer

Answer	Answer

Answer 1

n= 15 x 4 = 60

r = 6% x 1/4 = 1.5 % or 0.015.

Present value of the minimum lease payments = Quarterly payment x PVIFA _{1.5%, n=60} = Quartely payments x [ { 1 - ( 1 / ( 1 + r ) ⁿ} / r = $ 6,000 x [ ( 1 - ( 1 / ( 1.015) ⁶⁰ ] / 0.015 = $ 6,000 x 39.3803 = $ 236,281.80

In the books of Shroff Company:

Transaction / Event	Date	Account Titles	Debit	Credit
			$	$
a.	July 1, 2017	Leased Asset	236,280
		Lease Liability		236,280
		To record capital lease
b.	Sep 30, 2017	Lease Liability	2,456
		Interest Expense ( $ 236,280 x 1.5%)	3,544
		Cash		6,000
		To record lease payment
		Depreciation Expense ( $ 236,280/ 15 x 1/4)	3,938
	Sep 30, 2017	Accumulated Depreciation : Leased Asset		3,938
		To record depreciation expense
b.	Dec 31, 2017	Lease Liability	2,493
		Interest Expense	3,507
		Cash		6,000
		To record lease payment
b.	Dec 31, 2017	Depreciation Expense ( $ 236,280 / 15 x 1/2)	3,938
		Accumulated Depreciation: Leased Asset		3,938
		To record depreciation expense

c. Cash:

	Debit	Credit
07/01/2017	0	0
09/30/2017		6,000
12/31/2017		6,000

Leased Asset:

	Debit	Credit
07/01/2017	236,280

Accumulated Depreciation: Leased Asset

	Debit	Credit
07/01/2017		0
09/30/2017		3,938
12/31/2017		3,938

Lease Liability:

	Debit	Credit	Balance
07/01/2017		236,280
09/30/2017	2,456		233,824
12/31/2017	2,493		231,331

Interest Expense:

	Debit	Credit
07/01/2017	0	0
09/30/2017	3,544	0
12/31/2017	3,507	0

Depreciation Expense:

	Debit	Credit
07/01/2017	0	0
09/30/2017	3,938	0
12/31/2017	3,938	0

e. In the books of Shroff Company:

Transaction	Date	Account Titles	Debit	Credit
			$	$
a.	July 1, 2017	No JE required	0	0
b.	Sep 30, 2017	Lease Rent Expense	6,000
		Cash		6,000
		To record lease rent
	Dec 31, 2017	Lease Rent Expense	6,000
		Cash		6,000
		To record lease rent