On January 2 2018 Gold Star Leasing Company leases equipment

On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $100,000 residual value of the asset at the end of the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2018 to record the lease?

                                                PV Annuity Due           PV Ordinary Annuity               PV Single Sum

            8%, 5 periods                    4.31213                          3.99271                                 .68508

            10%, 5 periods                  4.16986                          3.79079                                 .62092

Solution

the option is B i.e.,

Leased equioment account ... Dr $758,449

cash account    $160,000

lease liability account $598,449