Question

The following facts pertain to a noncancelable lease agreement between Pharoah Leasing Company and Novak Company, a lessee.

Inception date:		May 1, 2017
Annual lease payment due at the beginning of
each year, beginning with May 1, 2017		$18,727.72
Bargain-purchase option price at end of lease term		$4,000
Lease term		5	years
Economic life of leased equipment		10	years
Lessor’s cost		$62,000
Fair value of asset at May 1, 2017		$82,000
Lessor’s implicit rate		9	%
Lessee’s incremental borrowing rate		9	%

Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Novak’s annual accounting period ends on December 31. Reversing entries are used by Novak. (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 titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and Round answers to 2 decimal places, e.g. 15.25.)

Date	Account Titles and Explanation	Debit	Credit
5/1/1712/31/171/1/185/1/1812/31/18
	(To record the lease.)
	(To record the first lease payment.)
5/1/1712/31/171/1/185/1/1812/31/18
	(To To record interest.)
	(To record depreciation.)
5/1/1712/31/171/1/185/1/1812/31/18
5/1/18
5/1/1712/31/171/1/185/1/1812/31/18
	(To record interest.)
	(To record depreciation.)

Answer 1

Answer -

Step - (1) - Information Given -

A noncancelable lease agreement between Pharoah Leasing Company and Novak Company, a lessee.

Annual lease payment due at the beginning of each year, beginning with May 1, 2017 = $18727.72.

Bargain-purchase option price at end of lease term = $4000.

Lease term = 5 Years.

Economic life of leased equipment = 10 Years.

Lessor’s cost = $62000.

Fair value of asset at May 1, 2017 = $82000.

Lessor’s implicit rate = 9%.

Lessee’s incremental borrowing rate = 9%.

.

Step - (2) -

Journal of Novak Company (lessee)

Date	Account Titles and Explanation	Debit ($)	Credit ($)
5/1/17	Lease equipment Lease Liability (To record the lease) Note - Fair value of asset at May 1, 2017 = $82000, [Given]	82000 -	- 82000
	Lease Liability Cash (To record the first lease payment.)	18727.72 -	- 18727.72
12/31/17	Interest Expense Interest Payable (To record interest) = [($82000-$18727.72)*9%] * (8 months/12 months) = ($5694.5052) * (8 months/12 months) = $3796.34.	3796.34 -	- 3796.34
	Depreciation Expense Accumulated Depreciation (To record depreciation) = [($82000/10 years) * (8 months/12 months)] = $5466.67	5466.67 -	- 5466.67
1/1/18	Interest Payable Interest Expense	3796.34 -	- 3796.34
5/1/18	Interest Expense [($82000-$18727.72)*9%] Lease Liability [Balancing figure] Cash (To record lease payment along with interest)	5694.51 13033.21 -	- - 18727.72
12/31/18	Interest Expense Interest Payable (To record interest) = [($50239.07*9%) * (8 months/12 months)] = $3014.34	3014.34 -	- 3014.34
	Depreciation Expense [$82000/10 years] Accumulated Depreciation (To record depreciation)	8200 -	- 8200
Total		143729.13	143729.13