Question

8:17 POO Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round answers to decimal places, eg 5.265.) Prepare all of the journal entries for the lessee for 2020 and 2021 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee's annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to O decimal places, es 5.265. Record journal entries in the order presented in the problem.)

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Shamrock Company. The following information relates to this agreement.

1.The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.

2.The fair value of the asset at January 1, 2020, is $55,000.

3.The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $5,000, none of which is guaranteed.

4.The agreement requires equal annual rental payments of $17,517 to the lessor, beginning on January 1, 2020.

5.The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee

.6.Shamrock uses the straight-line depreciation method for all equipment.

Answer 1

Solution:

1.

This lease is a capital lease to the lessee because the present value of the minimum lease payments exceeds 90% of the fair value of the asset.

Lease Amortisation Schedule
Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
01-01-2020				50088
01-01-2020	17517.00		17517	32571
01-01-2021	17517.00	1629	15888	16683
05-01-2022	17517.00	834	16683	0

Lease Liability
PV of Lease Payments
Lease Payment	17517
No of years	3
Interest rate	5%
PV annuity due Factor @ 5% for 3 years	2.86
PV of Lease Payments	50088

2.

	Journal Entries
Jan 01 2020	Right to use Asset	50088
	Lease Liability		50088
	(To record Liability)
Jan 01, 2020	Lease Liability	17517
	Cash		17517
	(To record lease payments)
31-Dec-20	Interest Expense	1629
	Interest Payable		1629
	( To record accrued interest)
	Depreciation Expense	16696
	Accumulated Depreciation - Right-to- Use Asset		16696
	(To record Depreciation Expense)
Jan 01 2021	Interest Payable	1629
	Interest Expense		1629
	(Reversing the entry)
	Interest Expense	1629
	Lease Liability	15888
	Cash		17517
	To record lease payment
31-Dec-21	Interest Expense	834
	Interest Payable		834
	( To record accrued interest)
	Depreciation Expense	16696
	Accumulated Depreciation - Right-to- Use Asset		16696
	(To record Depreciation Expense)