Question

ament CALCULATOR MESSAGE MY INSTRUCTOR FULL SCREEN PRINTER VERSION BACK NEXT Exercise 21-1 On January 1, 2017, Pronghorn Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Pronghorn to make annual payments of $8,200 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $5,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Pronghorn uses the straight-line method of depreciation for all of its plant assets Pronghorn's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown. Click here to view factor tables Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places..25124 and the final answer to o decimal places 58.9 0 The present value of the minimum lease payments Prepare all necessary journal entries for Pronghorn for this lease through January 1, 2018. (Credit account titles are automatically Indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account tles and enter o for the amounts. Round answers to decimal places.. 589 Date Account Titles and Explanation Debit Credit (To record the lease)

Answer 1

This is finance lease because more than 90% of life of asset is used by lessee.

The PV MLP will be calculated by using the 11% incremental borrowing rate.

PV = 4.102*8200 = 33,640. (Since first payment is in beginning of year)

Journal entries:

1. (To record lease)

Assets Dr 33640

To lease liability Cr 33640

2. (To record first payment)

Lease liability Dr 8200

To Cash/Bank Cr 8200

3. (To record depreciation)

Accumulated depreciation Dr 6728

To Asset Cr 6728

(33640/5 years)

4. (To record interest)

Interest Dr 2798.4

To lease liability Cr 2798.4

(33640-8200)*0.11

5. (To record second payment)

Lease liability Dr 8200

To Cash/Bank Cr 8200