Acc310 Company Lesseo leased equipment from On January 1 200

Company (Lesseo) leased equipment from On January 1, 2009, Manama Bahrain Incorporated (Lessor). Lease payments are s 200,000, payable annually beginning on January1, 2009 for twenty years. The lease is non-cacncelable. Additional facts The Fair value of the equipment on January 1. 2009, is $ 1,700,000. 2. Its estimated economic life was twenty-five years on January 1, 2009, 1. with unguaranteed residual value of $ 20,000. 3. The Lease is non-renewable, at the termination of the lease, the 4. 5. equipment reverts to Lessor The Lessor\'s implicit rate is 10% which is known to Manama\'s. Manama\'s incremental borrowing rate is 12% Manama uses the straight-line method of depreciation. 6. The present value of the minimum lease payments is $ 1,900,000. equired: repare the necessary journal entries, to be recorded by Manama for: 1. Entering into the lease on January 1, 2009 2. Making the lease payment on January 1, 2009. 3. Expenses related to the lease for the year ended December 31, 2009. 4. Making the lease payment on January 1, 2010. ns Account Debit Credit

Solution

Journal Entries:

1. At the time of entering into Lease:

Asset A/c Dr.     $1700000

Lessor A/c Cr.    $1700000

Note: In the lessee\'s books asset is always recorded at the lower of:

Present Value of Minimum Lease Payment, or

Fair Value of the Asset

2. At the time of making Payment on Jan 1, 2009

Lessor A/c Dr.    $ 200000

Bank A/c Cr.       $200000

3. Expenses related to Lease:

Depriciation A/c Dr.   $85000 (W.N.)

Asset A/c Cr.           $85000

W.N. Calculation of Depriciation:

$1700000/20 = $85000

4. Making Lease Payment on Jan 1, 2010

Lessor A/c Dr.     $200000

Bank A/c Cr.        $200000