On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a three-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $416,676 and has an expected economic life of four years. Aqua expects the residual value at December 31, 2024, to be $54,000. Negotiations led to Maywood guaranteeing a $76,000 residual value.
Equal payments under the lease are $108,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 6% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1. & 2. Prepare the appropriate entries for Maywood on January 1, 2021 and December 31, 2021, related to the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to the nearest whole dollar.)
This lease is consider as finance lease. Because of the lease period is equal to 75% (3 years lease / 4 expected life). | |
Year | PV factor @6% |
1 | 0.94340 |
2 | 0.89000 |
3 | 0.83962 |
Total PV annuity due (Total of 0 to 4) | 2.67301 |
Present value of lease payments (108000*2.67301) | $ 288,685 |
Present value of probable residual payment due (76000-54000= 22000) (22000*0.83962) | $ 18,472 |
Total present value | $ 307,157 |
Lease amortization table | |||||
Date | Beginning balance of lease payable | Lease payment | Interest expense (beginning balance of lease payable *11% ) | Reduction in lease payable (lease payment - interest expense) | Ending balance of lease payable (beginning balance of lease payable - reduction in lease payable) |
Jan 1, 2021 | $ 307,157 | ||||
Dec 31, 2021 | $ 307,157 | $ 108,000 | $ 18,429 | $ 89,571 | $ 217,586 |
Dec 31, 2022 | $ 217,586 | $ 108,000 | $ 13,055 | $ 94,945 | $ 122,642 |
Dec 31, 2023 | $ 122,642 | $ 130,000 | $ 7,358 | $ 122,642 | $ 0 |
Last payments includes = 108000 + 22000 = 130000 |
Lessee (Maywood ) | |||
Journal entries | |||
Date | General Journal | Debit | Credit |
Jan 1, 2021 | Right of use asset | $ 307,157 | |
Lease liability | $ 307,157 | ||
(To record the lease) | |||
Dec 31, 2021 | Lease liability | $ 89,571 | |
Interest expense | $ 18,429 | ||
Cash | $ 108,000 | ||
(To record lease payment) | |||
Dec 31, 2021 | Amortization Expense | $ 102,386 | |
Right of use Asset | $ 102,386 | ||
(To record depreciation) (307157/3) |
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