Question

The Luxumbourg Co. acquires a machine on a finance lease on July 1, 2015. The machine requires a five semi-annual payments of $75,000, with the first payment taking place on December 31, 2015. The effective rate of the lease is 11%. a. Show the journal entry for the acquisition of the machine on July 1, 2015. b. Show the journal entry for the lease payment made on June 30, 2016. c. Show the journal entry for depreciation expense; assume straight-line and zero salvage value.

Answer 1

Solution Semi-annual lease payments Lease term Effective rate of the lease $75,000 5 half years 11% Step-1: Calculation of lease liability Present value annuity factor @ 5.5% for 5 semi-annual periods Semi-annual lease payments Present value of annual lease payments ($75,000 x 4.27028) 4.27028 $75,000 $320,271 Step-2: Lease Amortization table Payment Date Annual Lease | Payments Effective Interest Decrease in Lease Liability Lease liability Balance July 01, 2015 Dec 31, 2015 Jun 30, 2016 Dec 31, 2016 Jun 30, 2017 Dec 31, 2017 $75,000 $75,000 $75,000 $75,000 $75,000 $17,615 $14,459 $11,129 $7,616 $3,910. $57,385 $60,541 $63,871 $67,384 $71,090 $320,271 $262,886 $ 202,345 $138,474 $ 71,090 $0 Required (a): Credit Debit $320,271 Date General Journal July 01, 2015 Leased Machinery Lease Liability (To record the acquisition of leased machinery) $320,271 Required (b): Credit Date Jun 30, 2016 General Journal | Interest Expense Lease Liability Cash (To record the lease payment on June 30, 2016) Debit $14,459 $60,541) $75,000 Required (c): Depreciable cost of machinery ($320,271 - $0) Useful life Depreciation for each year = $320,271/2.5 = $320,271 2.5 Years $128,108 Credit Debit $64,054 Date General Journal Dec 31, 2015 Depreciation expense ($128,108 x 6/12) Accumulated depreciation (To record the depreciation expense) $64,054