Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Kingbird Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2020, is $75,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $8,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $23,522.48 to the lessor, beginning on January 1, 2020.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Kingbird uses the straight-line depreciation method for all equipment.

Click here to view factor tables.

Prepare all of the journal entries for the lessee for 2020 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 2 decimal places, e.g. 5,265.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	(To record the lease)
1/1/2012/31/20	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	(To record lease liability)
1/1/2012/31/20	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount

Answer 1

Date	Particulars	Debit	Credit
01-01-2020	Leased asset A/c Dr,    To Lease liability A/c (to record Lease lease liability)	$64,057.59	$64,057.59
01-01-2020	Lease Rent A/c Dr, To cash A/c (Lease rent paid)	$23,522.48	$23,522.48
31-12-2020	Depreciation A/c Dr, To Depreciation Expenses A/c (Depreciation provided for the year)	$15,000	$15,000

Computation of lease liability

Annual lease rent = $23,522.48

Number of payments =3 years ( 3 times)

Present value factor @ 5% for 3 years = 2.72325

Net present value of lease rent = $64,057.59

Computation of Depreciation under straight line method

Depreciation =     (Cost – salvage value)/ estimated economic life

                        = $75,000/5 years = $15,000

Note

Here cost of the asset is not available, so, the fair value of the asset is treated as cost