Question

On January 1, 2021, Granite State Hospital leased medical equipment from Forest Corp. which had purchased the equipment at a cost of $2,874,474. The lease agreement specifies six annual payments of $600,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2025. The six-year lease term ending December 31, 2026 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index for the year just ended. Thus, the first payment will be $600,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 120. Forest routinely acquires medical equipment for lease to other firms. The interest rate in these financing arrangements is 10%.

Required:

Round your answers to the nearest whole dollar amounts.

1.Prepare the appropriate journal entries for Granite State and Forest to record the lease at its beginning.

2.Assuming the CPI is 124 at that time, prepare the appropriate journal entries for Granite State at December 31, 2021, related to the lease.

Answer 1

Answer
	Journal Entry
Part 1	Date	Particulars	Debit	Credit
1	01-01-2021	Right-of-use asset	$      28,74,474
		To, Lease payable		$      28,74,474
		(To record beginning of lease)
2	01-01-2021	Lease payable	$        6,00,000
		To, Cash		$        6,00,000
		(To record lease payment )
Part 2	Date	Particulars	Debit	Credit
1	31-12-2021	lease expense (620,000-600000)	$           20,000
		Interest expense (28,74,474-600000)*10%	$        2,27,447
		Lease payable (balancing figure)	$        3,72,553
		To, Cash (620000*124/120)		$        6,20,000
		(To record lease and interest payments)
2	31-12-2021	Amortization expense (28,74,474/6)	$        4,79,079
		To, Right of use asset		$        4,79,079
		(To record the amortization for right of use asset )