Question

Problem 3

Hood leased equipment from Rowe on January 1, 2021. Rowe manufactured the equipment at a cost of $200,000. Both lessee and lessor have December 31 year ends. Lease terms: Lease term 5 years, (20 quarterly periods) Quarterly payments, $15,000 beginning Jan 1, Mar 31, June 30, Sept.,30 and Dec. 31. Economic life of asset, 5 years Interest rate charged by lessor, 10% Depreciation is recorded quarterly

Required:

1. Prepare appropriate journal entries for the lessee at its beginning, January 1 2021, and on March 31.

2. Prepare appropriate journal entries for the lessor at its beginning, January 1 2021, and on March 31.

Answer 1

ANSWER

Period	Lease Payment	PV Factor @2.5%	Present Value
1	15,000	1	15,000
2	15,000	0.975610	14,634
3	15,000	0.951814	14,277
4	15,000	0.928599	13,929
5	15,000	0.905951	13,589
6	15,000	0.883854	13,258
7	15,000	0.862297	12,934
8	15,000	0.841265	12,619
9	15,000	0.820747	12,311
10	15,000	0.800728	12,011
11	15,000	0.781198	11,718
12	15,000	0.762145	11,432
13	15,000	0.743556	11,153
14	15,000	0.725420	10,881
15	15,000	0.707727	10,616
16	15,000	0.690466	10,357
17	15,000	0.673625	10,104
18	15,000	0.657195	9,858
19	15,000	0.641166	9,617
20	15,000	0.625528	9,383
Total	300,000		239,684

1.)	Date	Account Titles	Debit $	Credit $
	January 1,2021	Right of use assets	239,684
		Lease liability		239,684
	Mar.31,2021	Lease liability	9,008
		Interest Expense	5,992
		( 239,684 x 2.5% )
		Cash		15000
	Mar.31,2021	Amortization Expense	11,984
		Right of use assets		11,984
		( 239,684 / 20 )
2.)	Date	Account Titles	Debit $	Credit $
	January 1,2021	Lease Receivable	239,684
		Cost of goods sold	200,000
		Sales Revenue		239,684
		Equipment		200,000
	Mar.31,2021	Cash	15,000
		Interest Revenue		5,992
		( 239,684 x 2.5% )
		Lease Receivable		9,008

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