Question

On December 31, 2019, Windsor Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Windsor to make annual payments of $9,353 at the beginning of each year, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $4,800 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Windsor uses the straight-line method of depreciation for all of its plant assets. Windsor’s incremental borrowing rate is 15%, and the lessor’s implicit rate is unknown.

Answer 1

1	Computation of present value of minimum lease payments
	annual payments		9,353
	present value of annuity payments for 1-5 years @15%
		`=3.85498
	pv is	`=9,535*3.85498	`=36,757.234
2	journal entries
	01-01-2019	leased equipment		36,757.23
		lease liability			36,757.23
		lease liability		9,353
		cash			9,353
	31-12-2019	depreciation expense		7,351.45
		accumulated depreciation			7,351.45
		`=36,757.23/5
		interest expense		4,111
		to interest payable			4,111
		`=(36,757.23-9,353)*15%
	01-01-2020	lease liability		5,242
		interest payable		4,111
		cash			9,353

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