Question

On December 31, 2019, Kingbird Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Kingbird to make annual payments of $8,508 at the beginning of each year, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $4,700 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Kingbird uses the straight-line method of depreciation for all of its plant assets. Kingbird’s incremental borrowing rate is 5%, and the lessor’s implicit rate is unknown. Click here to view factor tables.

Compute the present value of the lease payments. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places e.g. 5,275.)

Prepare all necessary journal entries for Kingbird for this lease through December 31, 2020.

Answer 1

1	Computation of present value of minimum lease payments
	annual payments		8508
	present value of annuity payments for 1-5 years @5%
		`=4.54595
	pv is	`=8508*4.54595	`=38676.946
2	journal entries
	01-01-2019	leased equipement		38676.94
		to lease liablity			38676.94
		lease liability		8508
		to cash			8508
	31-12-2019	depreciation expense		7735.38
		to accumulated depreciation			7735.38
		`=38676.94/5
		intrest expense		1508
		to intrest payable			1508
		`=(38676.94-8505)*5%
	01-01-2020	lease liabilty		7000
		intrest payable		1508
		to cash			8508