Question

Exercise 21-1

On January 1, 2017, Nash Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Nash to make annual payments of $9,399 at the beginning of each year, starting January 1, 2017. 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. Nash uses the straight-line method of depreciation for all of its plant assets. Nash’s incremental borrowing rate is 9%, and the lessor’s implicit rate is unknown.

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Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

The present value of the minimum lease payments
$

Prepare all necessary journal entries for Nash for this lease through January 1, 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.)

Date
Account Titles and Explanation
Debit
Credit

1/1/17
12/31/17
1/1/18
(To record the lease.)
(To record first payment.)

1/1/17
12/31/17
1/1/18
(To record depreciation.)
(To record interest.)
1/1/18
(To record second payament.)

Answer 1

ANSWER:

This is a capital lease to Nash since the lease term (5years) which is most of the economic life (6 years) of the leased asset.

Computation of present value of minimum lease payments:

• $ 9399* 4.23972 = $39849

( 4.23972 is the present value of an annuity due of 1 for 5 periods at 9%).

Journal entries in the books of Nash :

1/1/17

Debit - Leased Machine A/c ................................... $39,849

Credit - Lease Liability A/c ..................................$39,849

[Being machine has taken on lease for 5 years]

1/1/17

Debit – Lease Liability A/c .......................................... $9,399

Credit –Cash A/c ................................................... $9,399

[Being Lease 1^st installment paid]

12/31/17

Debit – Depreciation A/c.............................$7,969

Credit - Accumulated Depreciation A/c - Capital Leases A/c ......... $7,969

($39,849 ÷ 5 = $7,969)

[Being depreciation accounted on leased machine (SLM ) ]

12/31/17

Debit - Interest Expense......................................$2,741

Credit - Interest Payable................................ $2,741

(($39,849 – $9,399) * 9%)

[Being Interest accounted]

1/1/18

Debit - Lease Liability..........................................$6,658

Debit- Interest Payable..........................................$2,741

Credit - Cash..................................................$9,399

[Being the Second installment paid with interest]