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.

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

Answer 1

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