Question

The city of Morehead leased equipment. The life of the noncancellable lease is 10 years. Using an 8 percent interest rate, the present value of the lease payments is $905,861. The first payment of $125,000 is due when the lease begins, January 10, 2017. An additional payment is due on January 10th for each of the next 9 years. Prepare journal entries to record:

1. The long-term lease in the General Fund.

2. The first lease payment on January 10, 2017.

3. The second lease payment on January 10, 2018

Answer 1

Journal Entries:
Date	Account titles and Explanation	Debit	Credit
January 10, 2017	Equipment	$     9,05,861.00
	Lease Payable		$ 9,05,861.00
	(To record lease liability at the beginning of lease period)
January 10, 2017	Lease Payable	$     1,25,000.00
	Cash		$ 1,25,000.00
	(To record lease payment)
January 10, 2018	Lease Payable	$        62,531.12
	Interest Expense	$        62,468.88
	Cash		$ 1,25,000.00
	(To record lease payment)
Working:
Lease amortization Schedule:
Lease payment no.	Year	Beginning Lease liability	Interest Expense	Annual Lease payment	Reduction in Lease Liability	Ending Lease Liability
		a	b=a*8%	c	d=c-b	e=a-d
1	0	$     9,05,861.00	0.00	$ 1,25,000.00	$ 1,25,000.00	$ 7,80,861.00
2	1	$     7,80,861.00	$     62,468.88	$ 1,25,000.00	$     62,531.12	$ 7,18,329.88
3	2	$     7,18,329.88	$     57,466.39	$ 1,25,000.00	$     67,533.61	$ 6,50,796.27
4	3	$     6,50,796.27	$     52,063.70	$ 1,25,000.00	$     72,936.30	$ 5,77,859.97
5	4	$     5,77,859.97	$     46,228.80	$ 1,25,000.00	$     78,771.20	$ 4,99,088.77
6	5	$     4,99,088.77	$     39,927.10	$ 1,25,000.00	$     85,072.90	$ 4,14,015.87
7	6	$     4,14,015.87	$     33,121.27	$ 1,25,000.00	$     91,878.73	$ 3,22,137.14
8	7	$     3,22,137.14	$     25,770.97	$ 1,25,000.00	$     99,229.03	$ 2,22,908.11
9	8	$     2,22,908.11	$     17,832.65	$ 1,25,000.00	$ 1,07,167.35	$ 1,15,740.76
10	9	$     1,15,740.76	$       9,259.26	$ 1,25,000.00	$ 1,15,740.74	$               0.02
Note:
Interest payment at year 0 means at the beginning of lease at that time there was no interest due.
So, interest expense for year 0(First lease payment) was taken as zero.