Marin Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December...

Marin Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $46,000 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%; Marin’s incremental borrowing rate is 9%. Marin is unaware of the rate being used by the lessor. At the end of the lease, Marin 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. Marin uses the straight-line method of depreciation on similar owned equipment. Prepare the journal entries, that Marin should record on December 31, 2020.

Expert Solution


Calculation of Present Value of Lease Payements:-

Date	Amount	Present value factor @9%	Present Value
December 31, 2020	46,000	1	46,000
December 31, 2021	46,000	0.917431	42,202
December 31, 2022	46,000	0.841680	38,717
December 31, 2023	46,000	0.772183	35,520
December 31, 2024	46,000	0.708425	32,588
December 31, 2024	5,000	0.708425	3,542
Total	235,000		198,569

Journal Entries :-

Date	Titles	Debit	Credit
December 31, 2020	Lease Asset	198,569
	Lease Liability		198,569

December 31, 2020	Lease Liability	46,000
	Cash		46,000


Lease Liability Amortization Schedule:-

Date	Opening Balance	Interest Expense@ 9%	Lease payment	Closing Balance
December 31, 2020	198,569	-	46,000	152,569
December 31, 2021	152,569	13,731	46,000	120,300
December 31, 2022	120,300	10,827	46,000	85,127
December 31, 2023	85,127	7,661	46,000	46,789
December 31, 2024	46,789	4,211	46,000	5,000
December 31, 2024	5,000	-	5,000	-

ekkarill92 answered 1 year ago

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