Question

Exercise 15-21 Lessee; variable lease payments (LO15-2, 15-6) On January 1, 2018, QuickStream Communications leased telephone equipment from Diglum, Inc. Diglum's cash selling price for the equipment is $2.177.630. The lease agreement specifies six annual payments of $500,000 beginning December 31, 2018, and at each December 31 thereafter through 2023. The six-year lease is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase by the higher of (a) the Increase in the Consumer Price Index for the preceding year and (b) 3 percent. The CPI at the beginning of the lease Is 130. Diglum routinely leases equipment to other firms. The Interest rate In these lease arrangements is 10% 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: Prepare the appropriate journal entries for QuickStream to record the lease at its beginning date of January 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required in the first account field. Round your answers to the nearest whole dollar amount.) View transaction lat Journal entry worksheet Record the beginning of the lease for QuickStream Communications Note: Enter debits before credits General Journal General Debit Credit Date January 01, 2018 Record entry Clear entry View general Journal

Answer 1

Date	Accounts	Debit	credit
01-01-18	Right of use asset	$           2,328,484
	Lease payable		$        2,328,484
Working
Year	In Substance fixed payment	PV factor @ 10%	Present value
1	$                                 500,000.00	0.90909	$      454,545.00
2	$                                 515,000.00	0.82645	$      425,621.75
3	$                                 530,450.00	0.75131	$      398,532.39
4	$                                 546,363.50	0.68301	$      373,171.73
5	$                                 562,754.41	0.62092	$      349,425.47
6	$                                 579,637.04	0.56447	$      327,187.72
			$ 2,328,484.06
When apparent “variable” payments actually are in­substance fixed payments we include these fixed payments as part of the lessee’s lease payments. Because QuickStream, the lessee, is required to make payments each year that are at least 3 percent more than the previous year, regardless of changes in the CPI, those paymentsare considered in­substance fixed payments. So we have taken in substance as 1.03 times the previous lease payment so 500000*1.03=515000 ; 515000*1.03=530450