Question

In: Accounting

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Novak Company....

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Novak 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 $74,000.

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 $22,886.45 to the lessor, beginning on January 1, 2020.

5.

The lessee’s incremental borrowing rate is 4%. The lessor’s implicit rate is 3% and is unknown to the lessee.

6.

Novak uses the straight-line depreciation method for all equipment.

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.)

Solutions

Expert Solution

Solution:

Lease Liability
PV of Lease Payments
Lease Payment 22886.45
No of years 3
Interest rate 4%
PV annuity due Factor @ 4% for 3 years 2.88609
PV of Lease Payments 66052.46
Lease Amortisation Schedule
Date Lease Payment Interest Expense Reduction in Liability Lease Liability
01-01-2020 66052
01-01-2020 22886.45 22886.45 43166
01-01-2021 22886.45 1726.64 21159.81 22006
05-01-2022 22886.45 880.25 22006.20 0
Journal Entries
Jan 01 2020 Right to use Asset 66052.46
    Lease Liability 66052.46
(To record Liability)
Jan 01, 2020 Lease Liability 22886.45
   Cash 22886.45
(To record lease payments)
31-Dec-20 Interest Expense 1726.64
    Interest Payable 1726.64
( To record accrued interest)
Depreciation Expense 22017
Accumulated Depreciation - Right-to- Use Asset 22017
(To record Depreciation Expense)

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