Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Crane Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 3 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 $49,000.
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 $5,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $15,438 to the lessor, beginning on January 1, 2017.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Crane uses the straight-line depreciation method for all equipment.

Assume that the expected residual value at the end of the lease is $10,000, such that the payments are $13,898.

PVAD(4%,3) =2.77509

Prepare all of the journal entries for the lessee for 2017 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. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 0 decimal places, e.g. 5,265. Credit account titles are automatically indented when the amount is entered.)

Answer 1

A в 1 Date Particulars 2 1-Jan-17 Lease equipment Lease liability (15438*2.8861) (To record the lease) с Debit ($) 44556 D Credit ($) 44556 NM + in ons 15438 1-Jan-17 Lease liability Cash (To record annual rental payment) 15438 15438 13 31-Dec-17 Interest expense (44556-15438)*5% 1456 Lease liability (balancing amount) 13982 Cash (To record interest expense and annual rental payment) 14 15 31-Dec-17 Depreciation expense (44556-10000)/3years 11519 Accumulated depreciation |(To record depreciation expense) 11519 16 17