On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information:
Lease term 6 years
Annual rental payable at the beginning of each year $50,000
Useful life of machine 8 years
Day’s incremental borrowing rate 15%
Implicit interest rate in lease (known by Day) 12%
Present value of annuity of 1 in advance for 6 periods at
12% 4.61
15% 4.35
The lease passes ownership of the machine to Day at the termination of the lease. The cost of the machine on Parr’s accounting record is $375,500.
lease liability at the beginning of the lease term = Annual rental payable at the beginning of each year * Present value of annuity of 1 in advance for 6 periods at 12%
lease liability at the beginning of the lease term = $50,000 * 4.61
lease liability at the beginning of the lease term = $230,500
Hence, the correct answer is b. $230,500
This is a capital lease because the lessor passes ownership of the machine to Day at the termination of the lease
the entry Day should make at the inception/beginning of the lease Jan 1, 2019
Day’s annual lease payment at end of 2019
reduction in lease liability = $50,000-($230,500*12%) = $22,340
Day’s annual interest payment at end of 2019
interest expense = $230,500 * 12% = $27,660
Day’s lease liability at the end of 2019 = $230,500 - $22,340 = $208,160
the depreciation journal entry at the end of 2019
depreciation expense =$230,500 / 6 = $38,417
On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent...
PROBLEM: On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable at the beginning of each year $50,000 Useful life of machine 8 years Day’s incremental borrowing rate 15% Implicit interest rate in lease (known by Day) 12% Present value of annuity of 1 in advance for 6 periods at 12% 4.61 15% 4.35 The lease passes ownership of the machine to Day at the termination of the lease. The cost of the machine...
PROBLEM: On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable at the beginning of each year $50,000 Useful life of machine 8 years Day’s incremental borrowing rate 15% Implicit interest rate in lease (known by Day) 12% Present value of annuity of 1 in advance for 6 periods at 12% 4.61 15% 4.35 The lease passes ownership of the machine to Day...
On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable at the beginning of each year $50,000 Useful life of machine 8 years Day's incremental borrowing rate 15% Implicit interest rate in lease (known by Day) 12% Present value of annuity of 1 in advance for 6 periods at 12% 4.61 15% 4.35 The lease passes ownership of the machine to Day at the termination of...
On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable at the beginning of each year $50,000 Useful life of machine 8 years Day's incremental borrowing rate 15% Implicit interest rate in lease (known by Day) 12% Present value of annuity of 1 in advance for 6 periods at 12% 4.61 15% 4.35 The lease passes ownership of the machine to Day at the termination of...
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