Question

On January 1, 2020, Blue Animation sold a truck to Peete Finance for $40,000 and immediately leased it back. The truck was carried on Blue’s books at $35,000. The term of the lease is 5 years, there is no bargain purchase option, and title does not transfer to Blue at lease-end. The lease requires 5 equal rental payments of $9,239 at the end of each year (first payment on January 1, 2018). The appropriate rate of interest is 5%, the truck has a useful life of 5 years, with no expected residual value at the end of the lease term.

Prepare Blue’s 2020 journal entries.

Date	Account Titles & Explanation	Debit	Credit
01/01/2020	Cash	40,000
	????		40,000
12/31/2020	????
	????

Answer 1

Answer :-

	Annual Rental Payment	9,239
	P.V. of an annuity for n = 5 & I =5%	4.329
	P.V. of rental Payments =	39,995.63
Year	Annual Lease Expense	Interest @ 5% on Outstanding Balance (Col.2-Col.3)	Reduction in Balance (Col.2 -Col.3)	Outstanding Balance
1				39,995.63
1	9,239	1,999.78	7239.22	32,756.41
Date	Account Title expense and Explanation	Debit	Credit
1/1/2017	Cash	40,000
	Trucks		35,000
	Gain on disposal of plan Assets		5,000
	(To record sales of Truck)
1/1/2017	Right to use Assets	39,995.63
	Lease Liability		39,995.63
	(To record Lease Liability )
12/31/2017	Lease expense	9,239
	Lease Liabilty		1,999.78
	Right to use Assets		7239.22