Question
In: Accounting
On December 31, 2019, Kingbird Corporation signed a 5-year, non-cancelable lease for a machine. The terms...
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.
What type of lease is this?
| This is a/an select a type of lease |
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.)
| Present value of the lease payments |
$enter the Present value of the lease payments in dollars |
To record the lease
| Account Title | Debit | Credit |
b. To record first lease payment
| Account Title | Debit | Credit |
c. To record amortization of right-of-use asset
| Account Title | Debit | Credit |
d. To record interest expense
| Account Title | Debit | Credit |
Solutions
Expert Solution
1.This is a capital lease since the lease term (5 years) is greater than 75% of the economic life (6 years) of the leased asset. The lease term is 831/3% (5 ÷ 6) of the asset’s economic life
2.Present value of lease payemnts
| Year | Cash Flow | PV Factor @5% | Discounted cash flow |
| 1 | 8,508.00 | 1 | 8,508.00 |
| 2 | 8,508.00 | 0.952381 | 8,102.86 |
| 3 | 8,508.00 | 0.907029 | 7,717.01 |
| 4 | 8,508.00 | 0.863838 | 7,349.53 |
| 5 | 8,508.00 | 0.822702 | 6,999.55 |
| Total | 38,677 |
Minimum value of lease payments=$38677
3.Journal Entries
a. To record the lease
| Account Title | debit | Credit |
| Leased Equipment | 38677 | |
| Lease Liability | 38677 |
b.To record first lease payment
| Account Title | debit | Credit |
| Lease Liability | 8508 | |
| Cash | 8508 |
c. To record amortization of right-of-use asset
| Account Title | debit | Credit |
| Depreciation Expense | 7735 | |
| Accumulated Depreciation - Capital Leases | 7735 |
* $38677 / 5= $7735
d. To record interest expense
| Account Title | debit | Credit |
| Interest Expense | 1508 | |
| Interest Payable | 1508 | |
| Lease Liability | 7000 | |
| Interest Payable | 1508 | |
| cash | 8508 |
* (38677-8508) x 0.05 = 1508
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