Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Swifty Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 5 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, 2017, is $83,100. 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 $7,600, none of which is guaranteed. 4. Swifty Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $870 to Rocky Mountain Insurance Company for insurance and (2) $1,590 to Laclede County for property taxes. 5. The agreement requires equal annual rental payments of $18,797.04 to the lessor, beginning on January 1, 2017. 6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee. 7. Swifty Company uses the straight-line depreciation method for all equipment. 8. Swifty uses reversing entries when appropriate. Click here to view factor tables

Prepare an amortization schedule that would be suitable for the lessee for the lease term. Prepare all of the journal entries for the lessee for 2017 and 2018 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.

Answer 1