Question

Knight Company purchased a machine on January 1, 2015, for $625,000 for the express purpose of leasing it. The machine was expected to have a nine-year life from January 1, 2015, to have no salvage value, and to be depreciated on the straight line basis. On April 1, 2015, Knight leased the machine to McCracken Inc. for $150,000 a year for a four-year period ending March 31, 2019. The appropriate interest rate is 12% compounded annually. McCracken paid $150,000 to Knight on April 1, 2015. Knight retains title to the property and plans to lease it to someone else after the four-year lease period. Both Knight and McCracken use a calendar year basis for financial reporting purposes.

Record all entries for 2015 relating to the lease on the books of Knight.

Record all entries for 2015 relating to the lease on the books of McCracken.

Answer 1

Cost of Machine purchased on January 1,2015	$            625,000
Expected life of machine	9 years
Lease Amount	$            150,000
Lease Period	4 years
The lease is an operating lease
Journal Entries
In the books of Knight
Date	Particulars	Debit	Credit
2015
Jan-01	Machine	$            625,000
	Bank		$        625,000
Apr-01	Bank	$            150,000
	Lease Rental		$        150,000
Dec-31	Depreciation	$              69,444		=(625000-0)/9
	Machine		$          69,444
In the books of McCraken
Date	Particulars	Debit	Credit
2015
Apr-01	Lease Expense	$            150,000
	Bank		$        150,000