Question

Use Table 1 and Table 2 to calculate present value answers. Rigby Corporation has leased a piece of equipment that has a useful life of 12 years. This capital lease requires payments of $86,000 per year for 12 years. Rigby currently is able to borrow money at a long-term interest rate of 15 percent. Round your answers to the nearest dollar.

1. Calculate the present value of the lease agreement.

2. Prepare the journal entry to record the lease agreement.

3. Prepare the journal entry to record depreciation of the equipment for the first year using the straight-line method.

4. Prepare the journal entries to record the lease payments for the first two years. If an amount box does not require an entry, leave it blank.

Answer 1

1.

Lease Payment Amount		PV Factor (i=15%, n=12)		Present value of lease payments
86000	x	5.421	=	466206

Note: Please check the number of decimal places for the PV factor in the tables provided with the question and use accordingly since the same have not been posted with the question.

2.

Transaction	General Journal	Debit	Credit
2	Equipment	466206
	Lease liability		466206
	(To record capital lease of equipment)
3	Depreciation expense ($466206/12 years)	38851
	Accumulated depreciation-equipment		38851
	(To record depreciation on leased equipment)
4	Lease liability	16069
	Interest expense	69931
	Cash		86000
	(To record lease payment for year 1)
	Lease liability	18479
	Interest expense	67521
	Cash		86000
	(To record lease payment for year 2)

Working:

Period Ending Date	Beginning Balance of Lease Liability	Interest on Lease Liability	Reduction of Lease Liability	Cash Lease Payment
Year 1	466206	69931	16069	86000
Year 2	450137	67521	18479	86000