Question

On January 1, 2018, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from Computer World Leasing, which routinely finances equipment for other firms at an annual interest rate of 6%. The contract calls for four rent payments of $17,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by Computerworld at a cost of $104,000 and were expected to have a useful life of Five years with no residual value. Both firms record amortization and depreciation semi-annually. (V of $1. PV of $1. FVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Prepare the appropriate entries for both the lessee and the lessor from the beginning of the lease through the end of 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest whole dollar amount.) View transaction list Journal entry worksheet 1 0 0 0 0 0 0 0 0 Record the beginning of the lease for Nath-Langstrom Services. Note: Enter debits before credits Date General Journal Debit Credit January 01. 2018 Right of use asset rease payable

Answer 1

The Nath-Langstorm (Lessee) records the leased computers at the value which is lower of Cost or Present value of minimum lease payment i.e. rental payments. Cost of Computers: $104.000 Compute present value of rental payment: Year Rental payments PVAF at 3% 1 $17,000 0.9708737 2 $17,000 0.9425959 $17,000 0.9151416 $17,000 0.888487 Present value of rental payment Present value $16.505 $16,024 $15,557 $15.104 $63.191 Hence, the present value of rental payment is $63.191. In this situation lessee would capitalize the value of the computers at $63,191. Prepare journal entries in the books of Nath-Langstorm:

Credit Date Jan. 01, 2018 Account Title and Explanation Right-of use asset Lease payable Debit $63.191 $63,191 June 30, 2018 Interest expense ($63,191 x 39%) Lease payable Cash $1.896 $15,104 $17.000 $15.104 June 30, 2018 Amortization expense ($17,000 - $1896) Right-of use asset $15.104 Dec. 31, 2018 Interest expense ((S63.191 -$15.104) 3%] Lease payable ($17,000 - $1,443) Cash $1,443 $15,557 $17.000 $15,557 Dec 31, 2018 Amortization expense ($17,000 - $1,443) | Right-of use asset $15,557 Prepare joumal entries in the books of Computer World:

Credit Date Account Title and Explanation June 30, 2018 Cash Lease revenue Debit $17.000 $17,000 T $10.400 June 30, 2018 Depreciation expense ($104000+5) + 2 Accumulated depreciation $10.400 $17.000 Dec. 31, 2018 Cash Lease revenue $17,000 $10.400 Dec 31, 2018 Depreciation expense ($104000-5) = 2 Accumulated depreciation $10,400