Question

Larkspur Company leased equipment from Costner Company, beginning on December 31, 2016. The lease term is 4 years and requires equal rental payments of $65.962 at the beginning of each year of the lease, starting on the commencement date (December 31, 2016). The equipment has a fair value at the commencement date of the lease of $230,000, an estimated useful life of 4 years, and no estimated residual value. The appropriate interest rate is 10%. Click here to view the factor table. Prepare Larkspur's 2016 and 2017 journal entries, assuming Larkspur depreciates similar equipment it owns on a straight-line basis. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit 12/31/16 (To record lease liability) 12/31/16 (To record lease payment) 12/31/17 (To record interest expense) 12/31/17 (To record amortization of the right-of-use asset)

Answer 1

Calculation of Present value of minimum lease payment

Years	Annual Lease Payment	Present value @ 10%	Present value
1	65962	0.909	59959
2	65962	0.826	54485
3	65962	0.751	49537
4	65962	0.683	45052
	263848		209034

Journal Entries

31.12.16	Asset Account	Dr	209034
		To Lease Liability		209034
	Being Asset recorded at present value or Fair market value whichever is lower
	209034 or 230000= 209034
31.12.16	Lease Liability	DR	65962
		To Bank		65962
	Being payment done
31.12.17	Lease liability	Dr	51655		(65962-14307)
	Finance charge Account	DR	14307
		To Bank		65962
	To record interest payment
	(209034-65962) x 10 % = 14307
31.12.17	Depreciation	Dr	52258
		To Asset		52258
	ammortization of right to use asset
	209034 / 4 = 52258