Question

Operating Lease (Calculator set on BEG). - On January 1st, 2019 Asphalt Paving Co leased a road-paving machine from ABC Equipment for 4 years. Payments under the lease were $187,635.68, with the first due upon signing of the lease on January 1, 2019, and the remainder due on December 31, 2019, and the following 2 years. The equipment had a sales price of $1,000,000 and an estimated useful life of 6 years. The interest rate implicit in the lease is 5%.

a. Calculate the present value of future lease payments

b. How much lease expense would be reported by the Lessee under this Lease in each year?

c. Prepare the first three lines of the amortization table that would be used by both the lessee and the lessor

d. Record all journal entries related to this lease for Asphalt Paving for 2019 and 2020

Answer 1

Q.no-a)

Present value of Future lease payments
Year	Lease payment ($)	Discounting factor at 5%	Present value ($)
0	187,635.68	1	187,635.68
1	187,635.68	0.9523	178,685.46
2	187,635.68	0.9070	170,185.56
3	187,635.68	0.8638	162,079.70
	Total		698,586.40

Q.no-b)The lessee would recognize a lease expenditure of $ 187,635.68 each year for four years.

Accounting for operating lease is straight forward lease payments are considered as operating expenses and expensed in the income statement

Q.no-c)Amortization schedule

Payment date	Opening balance ($)	Total payment ($)	Interest expense ($)	Principal repayment ($)	Closing balance ($)
	698,586.40
1-Jan-19	698,586.40	187,635.68	-	187,635.68	510,950.72
31-Dec-19	510,950.72	187,635.68	25,547.54	162,088.14	348,862.58
31-Dec-20	348,862.58	187,635.68	17,443.13	170,192.55	178,670.03
31-Dec-21	178,670.03	187,635.68	8,933.50	178,702.18	(32.15)

Note - Closing balance should be nil but is (32.15) due to approximation error.

Q.no-d)Journal entries in the books of lessor Asphalt paving

Date	Particulars	Debit	Credit
1-Jan-19	Cash/Bank	187,635.68
	To rental income		187,635.68
	(Being income received on lease of road paving machine)
31-Dec-19	Cash/Bank	187,635.68
	To rental income		162,088.14
	To interest income		25,547.54
	(Being income received on lease of road paving machine)
31-Dec-19	Depreciation	166,666.67
	To Provision for depreciation		166,666.67
	(Being road paving machine depreciated under straight line method) (1,000,000 / 6 years)
31-Dec-20	Cash/Bank	187,635.68
	To rental income		170,192.55
	To interest income		17,443.13
	(Being income received on lease of road paving machine)
31-Dec-20	Depreciation	166,666.67
	To Provision for depreciation		166,666.67
	(Being road paving machine depreciated under straight line method)