Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Skysong 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, 2020, is $77,000.
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 $9,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $23,907.43 to the lessor, beginning on January 1, 2020.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Skysong uses the straight-line depreciation method for all equipment.

Prepare all of the journal entries for the lessee for 2020 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.

Date Account Titles and Explanation Debit Credit (To record the lease) (To record lease liability)

Answer 1

LUULERcel FILE DATA REVIEW VIEW DEVELOPER ACROBAT New Tab KPMG = D HOME INSERT PAGE LAYOUT FORMULAS % Cut Calibri 11 AA EB Copy BIU - SA Format Painter Clipboard Font e Paste Wrap Text Merge & Center - General ¢, oz $ . % E , 898 00 Insert Delete Conditional Format as Formatting Table Styles Cell Styles Alignment Number Cells 113 Recognition of right of use asset in books of Lessee O Right of use asset is recognised at lower of: 11 1. Fair Value 12 2. Present value of minimum lease payment 13 Lower of 1 & 2 77,000 68,361 68,361 Computation of Present Value of minimum lease payment Note: 1.It is mentioned in the question annual lease payment are made, beginning from 1 January 2020. That means all lease rent are payable at the beginning of yel w ie...in advance. Note: 2 There is no guarantee residual value Computation of present value of annual lease rent Year 1-Jan-20 1-Jan-21 1-Jan-22 Total Lease rent 23907.43 23907.43 23907.43 PV@5% 1 0.952 0.907 $ $ $ $ Total 23,907 22,769 21,685 68,361 ANSSEN Computation of depreciation 68,361 28 Right of use Asset - [A] 29 Lease period - [B] 30 Annual depreciation C = [A/B] 22,787 Sheet1 READY 1 O Type here to search

Khan, Later == Wiap Text General D P X AutoSum A # BE Insert Delete Format E E s Merge & Center - $ % , 8. Conditional Format as Cell Formatting Table Styles Styles Fill- Clear Sort & Filter Editing Find & Select Alignment Number Cells Date Credit Journal Entries in the books of Sklysong Company Particulars Debit 1-Jan-20 Right of use asset a/c $ 68,361 To Lease Liability - Laura Leasing Company a/c $ 68,361 (Being Asset taken on lease) $ 23,907 1-Jan-20 Lease Liability - Laura Leasing Company a/c To Cash a/c (Being annual lease rent paid) $ 23,907 Note: You can club the second entry in the first journal entry by crediting cash with 23907.43 and lease liability at 44453.57 (68361 - 23907.43) 31-Dec-20 Depreciation a/c $ 22,787 To accumulated depreciation a/c $ 22,787 (being depreciation for the year recorded) $ 22,787 $ 22,787 31-Dec-20 Profit and loss a/c To Depreciation a/c (Being depreciation expense charged to profit and loss account) Note: We will pass the journal entry on 1 January 2021 to record the finance/interest expense. The reason is we paying the lease rent at the beginning. - + 100 gl A DM 119/2013