Question

January 1, 2019, B enters into a 3-year non-cancelable lease agreement for an asset with an 8-year useful life. The lease requires annual payments on January 1st of each year. elease requires annual payments of $20,000 on At the end of the lease term, B has the option to purchase the asset for the bargain purchase price of $33,660 and it is reasonably assured that B will exercise option. B's incremental borrowing rate is 10%. Relevant present value factors are as follows: PV for ordinary annuity, 3 periods, 10% 2.48685 PV for annuity due, 3 periods, 10% 2.73554 PV for single sum, 3 periods, 10% 0.75132 INSTRUCTIONS: a. Prepare the journal entry for the signing of the lease on January 1, 2019. b. Prepare the journal entry for the first payment on 1/1/19 c. Prepare the journal entries required on December 31, 2019. d. Prepare the journal entry for the second payment on 1/1/20.

Answer 1

Date particulars Credih $80,000 January 1, 2019 $80,000 Right of use Asset Lease payable C Amount to be recorded at inception of lease.) 2. January Lease payable Cash ( First Installment paid at $20,000 beginning of lease.) $19.000 3. December $19.00 3, 2019 Depreciation Accumulated Depreciation (Depreciation charged for first year- Scanned with CamScanner

3 Coc December 31, 2019 86000 Interest Expense Interest payable (Being Interest amount. recognised for tear 2018) G. Januaraigh 27 2020 $ 14000 Interest payable Lease payable Cash (Being the actual payment made on beginning & Second Year) $ 20,000 CamSce

since it is a 3-Year non-Cancelable lease and at the end of 3rd year 8 had the option to purchase the asset and it is reasonably certain that he will purchase It is treated as Capital lease. 1. At Inception (signing of leave Present value of minimum the entry will be Lease payments. Since kase payments are started from beginning of leve the pu for annuity due, 3 period of 242554 2.7554 is relevant. ex 2-73554 = 54,711 $33,660 x 0.75132 - 25 at lease is recorded of 8 years so aset as the useful life depreciated for assets 8 year = since = looo. it is no mentioned in question and residual value is zero First Installment is Remainly due Interest e col on Scanned with Soon Second CamScanner pokon is paid on Jan 1, 2019 = $20,000 80,00 -2,00 6,00 60,000 & 6000 Installment of 200 600 and pana polis of 20 mgo 1 poincipalis interest 14,000