Question

On January 1, 2021, QuickStream Communications leased telephone equipment from Digium, Inc. Digium's cash selling price for the equipment is $1,749,508. The lease agreement specifies six annual payments of $390,000 beginning December 31, 2021, and at each December 31 thereafter through 2026. 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 or (b) 2%. The CPI at the beginning of the lease is 120. Digium routinely leases equipment to other firms. The interest rate in these lease arrangements is 9%. (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, 2021. (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.) No Answer is complete but not entirely correct. Date General Journal Debit January 01, 2021 Right-of-use asset 1,749,508 % Lease payable Credit 1,749,508

An explanation and calculations would be appreciated.

Answer 1

Solution:

No	Date	General Journal	Debit	Credit
1	Jan. 01. 2021	Right-of-use asset	$ 1,830,249
		Lease payable		$       1,830,249
		(To record lease )

Notes:

1)

Date	Lease payment(a)	PVF @ 9%(b)	PV of Lease payments(a*b)
1/1/2021	$                   390,000	0.91743	$                                     357,798
1/1/2022	$                   397,800	0.84168	$                                     334,820
1/1/2023	$                   405,756	0.77218	$                                     313,318
1/1/2024	$                   413,871	0.70843	$                                     293,197
1/1/2025	$                   422,149	0.64993	$                                     274,368
1/1/2026	$                   430,592	0.59627	$                                     256,748
			$                                  1,830,249

2) Lease Payments will increase every year by 2% as given in the question.

1st year = $ 390000

2nd year = $ 390000 + 2% = $ 397800

3rd year = $ 397800 + 2% = $ 405756 like wise till year 6.

3) All numbers are rounded to nearest whole dollar.