Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Sage Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 5 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, 2017, is $84,600. 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 $6,800, none of which is guaranteed. 4. Sage Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $810 to Rocky Mountain Insurance Company for insurance and (2) $1,630 to Laclede County for property taxes. 5. The agreement requires equal annual rental payments of $18,911.74 to the lessor, beginning on January 1, 2017. 6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 9% and is known to the lessee. 7. Sage Company uses the straight-line depreciation method for all equipment. 8. Sage uses reversing entries when appropriate.

Prepare all of the journal entries for the lessee for 2017 and 2018 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.

JS Kieso, Intermediate Accounting, 16e Help I System Announcements SAGE COMPANY (Lessee) Lease Amortization Schedule Annual Lease Interest on Liability Reduction of Lease Payment Liability Lease Liability Date 1/1/17 0 0 0 80180.48 1/1/17 18911.74 0 18911.74 61268.74 1/1/18 18911.74 5514.19 13397.55 47871.19 1/1/19 18911.74 4308.41 14603.33 33267.85 1/1/20 18911.74 2994.11 15917.63 17350.22 1/1/21 1561.52 18911.74 17350.22 94558.7 14378.22 80180.48

Answer 1

Date	Account Titles and Explanation	Debit ($)	Debit ($)
01-01-2017	Lease equipment under capital lease	80180.48
	Lease Liability		80180.48
	(To record the lease)
01-01-2017	Lease Liability	18911.74
	Cash		18911.74
	(to record lease payment)
31-12-2017	Insurance expense	810
	Cash		810
	(to record insurance payment)
31-12-2017	Property Tax expense	1630
	Cash		1630
	(to record property tax payment)
31-12-2017	Interest expense	5514.19
	Interest Payable		5514.19
	(to record interest)
31-12-2017	Depreciation expense	16036.1
	Accumulated Depreciation - capital leases		16036.1
	(to record depreciation)
01-01-2018	Interest payable	5514.19
	Interest expense		5514.19
	(to reverse interest)
01-01-2018	Interest expense	5514.19
	Lease Liability	13397.55
	Cash		18911.74
	(to record lease payment)
31-12-2018	Insurance expense
	Cash	810
	(to record insurance payment)		810
31-12-2018	Property Tax expense
	Cash	1630
	(to record property tax payment)		1630
31-12-2018	Interest expense	4308.41
	Interest Payable		4308.41
	(to record interest)
31-12-2018	Depreciation expense	16036.1
	Accumulated Depreciation - capital leases		16036.1
	(to record depreciation)
	Note:
	Calculation of Depreciation
	80180.48/5 = $16036.10
	I assume insurance and property tax expense is paid at the year end.