Homework SourseExercise 2111 Laura Leasing Company signs an agreement on Ja
Exercise 21-11
Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Skysong Company. The following information relates to this agreement.
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Prepare all of the journal entries for the lessee for 2017 and 2018 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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select \"No Entry\" for the account titles and enter 0 for the amounts. Round answers to 2 decimal places, e.g. 15.25.)
Date
Account Titles and Explanation
Debit
Credit
(To record the lease.)
(To record lease payment.)
(To record insurance payment.)
(To record property tax payment.)
(To record interest.)
(To record depreciation.)
(To reverse interest.)
(To record lease payment.)
(To record insurance payment.)
(To record property tax payment.)
(To record interest.)
(To record depreciation.)
| 1. | The term of the noncancelable lease is 5 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, 2017, is $83,100. | |
| 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 $7,600, none of which is guaranteed. | |
| 4. | Skysong Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $870 to Rocky Mountain Insurance Company for insurance and (2) $1,590 to Laclede County for property taxes. | |
| 5. | The agreement requires equal annual rental payments of $18,797.04 to the lessor, beginning on January 1, 2017. | |
| 6. | The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee. | |
| 7. | Skysong Company uses the straight-line depreciation method for all equipment. | |
| 8. | Skysong uses reversing entries when appropriate. |
Solution
Fair Value of Lease = Annual Rentals*PVAF(10%, 5 yrs) (beginning of period)
= $18,797.04*4.16987 = $78,381.21
Journal Entries (Amounts in $)
| Date | Account Titles and Explanation | Debit | Credit |
| 1/1/17 | Leased Equipment | 78,381.21 | |
| Lease Liability | 78,381.21 | ||
| (To record the lease) | |||
| Lease Liability | 18,797.04 | ||
| Cash | 18,797.04 | ||
| (To record lease payment) | |||
| During 2017 | Insurance Expense | 900 | |
| Cash | 900 | ||
| (To record insurance payment) | |||
| Property Tax Expense | 1,600 | ||
| Cash | 1,600 | ||
| (To record property tax payment) | |||
| 12/31/17 | Interest Expense [($78,381.21-$18,797.04)*10%] | 5,958.42 | |
| Interest Payable | 5,958.42 | ||
| (To record interest) | |||
| Depreciation Expense ($78,381.21/5 yrs) | 15,676.24 | ||
| Accumulated Depreciation-Capital Leases | 15,676.24 | ||
| (To record depreciation) | |||
| 1/1/18 | Interest Payable | 5,958.42 | |
| Interest Expense | 5,958.42 | ||
| (To reverse interest) | |||
| 1/1/18 | Lease Liability ($18,797.04-$5,958.42) | 12,838.62 | |
| Interest Expense | 5,958.42 | ||
| Cash | 18,797.04 | ||
| (To record lease payment) | |||
| During 2018 | Insurance Expense | 900 | |
| Cash | 900 | ||
| (To record insurance payment) | |||
| Property Tax Expense | 1,600 | ||
| Cash | 1,600 | ||
| (To record property tax payment) | |||
| 12/31/18 | Interest Expense [($78,381.21-$18,797.04-$12,838.62)*10%] | 4,674.56 | |
| Interest Payable | 4,674.56 | ||
| (To record interest) | |||
| Depreciation Expense ($78,381.21/5 yrs) | 15,676.24 | ||
| Accumulated Depreciation-Capital Leases | 15,676.24 | ||
| (To record depreciation) |
