Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Windsor Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2020, is $66,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $5,000, none of which is guaranteed. 4. The agreement requires equal annual rental payments of $21,328 to the lessor, beginning on January 1, 2020. 5. The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee. 6. Windsor uses the straight-line depreciation method for all equipment.

Prepare an amortization schedule that would be suitable for the lessee for the lease term

Prepare all of the journal entries for the lessee for 2020 and 2021 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31

Answer 1

PV Of Annual Lease Payment = Lease Payment * PVAF (3 yesrs )
=	$21328*(1+1/1.04)2
=	$21328*2.8861
=	61554.4
PV Of Residual Value =5000*.8889
=	4444.5
Lease Liability =PV Of Annual Lease +PV OF Resideual Value
=	61555.6+4444.4
	66000
Depreciation	66000-5000
=	6years
	20333.33333

	Lease Amortization schedule
Date	Annual Lease payment & Guarantee Residual value	Interst on liability	Reduction Of Lease Liability	Lease Liability
1/1/2020				66000
1/1/2020	21328	0	21328	44672
1/1/2021	21328	1786.88	19541.12	25130.88
1/1/2022	21328	1005.2352	20322.76	4808.115
1/1/2022	5000	192.32461	4807.675	0

	In the Books of Leassee company
1.1.2020	Lease Expencess	66000
	To Lease Liability		66000
	Recolrding Liability
1.1.2020	Lease Liability	21328
	to Cash		21328
	Cash received
1/12/2020	Depreciation Exp	20333.33
	to Lease Expences		20333.33
	Depreciation Exp chareg
1/12/2020	Interst Expencess	1786.88
	to Interest payable		1786.88
	Expence receivalbe

1.1.2021	Lease Liability	19541.12
	to Interest payable	1786.8
	to Cash		21328
	Cash received
1/12/2021	Depreciation Exp	20333.33
	to Lease Expences		20333.33
	Depreciation Exp chareg
1/12/2021	Interst Expencess	1005
	to Interest payable		1005
	Expence receivalbe