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 $5,000. 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 a financial statement effects template to show the effects of recording the initial signing of the lase on July 1, 2017 and the necessary entries on September 30 and December 31, 2017.

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

Answer 1

Transaction	Cash asset	+	Non cash asset	-	Contra asset	=	Liabilities	+	Contributed Capital	+	Earned Capital			Revenue	-	Expenses	=	Net income
7/1/17 Signed a capital lease			196901				196901
9/30/17 Depreciation on leased asset					3282						-3282					3282		-3282
9/30/17 made quarterly lease payment	-5000						-2046				-2954					2954		-2954
12/31/17 Depreciation on leased asset					3282						-3282					3282		-3282
12/31/17 made quarterly lease payment	-5000						-2077				-2923					2923		-2923

Workings:

Calculation of the fair value of the lease

Lease Rental	5000
Mode of payment	Quarterly
Period of the lease	15 years
Number of lease instalments	60
Interest Rate p.a.	6%
Present value of an annuity of $1 for 60 periods at 1.5%	39.38027
(1-(1+r)^-n)/r = (1-(1.015)^60)/0.015
Fair value of the lease payments (5,000 x 39.38027)	196901

Lease payment schedule for 2017 and 2018

Date	Cash payment	Interest	Lease rental	Balance
7/1/17				196901
9/30/17	5000	2954	2046	194855
12/31/17	5000	2923	2077	192777
03/31/18	5000	2892	2108	190669
06/30/18	5000	2860	2140	188529
9/30/18	5000	2828	2172	186357
12/31/18	5000	2795	2205	184152