Question

On January 1, 2017, Concord Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Concord to make annual payments of $8,479 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $4,600 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Concord uses the straight-line method of depreciation for all of its plant assets. Concord’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.

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Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

The present value of the minimum lease payments

$enter the present value of the minimum lease payments rounded to 0 decimal places

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List of Accounts

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Prepare all necessary journal entries for Concord for this lease through January 1, 2018. (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 answers to 0 decimal places e.g. 58,971.)

Date	Account Titles and Explanation	Debit	Credit
choose a transaction date                                                                      1/1/1712/31/171/1/18	enter an account title to record the lease	enter a debit amount	enter a credit amount
	enter an account title to record the lease	enter a debit amount	enter a credit amount
	(To record the lease.)
	enter an account title to record the first payment	enter a debit amount	enter a credit amount
	enter an account title to record the first payment	enter a debit amount	enter a credit amount
	(To record first payment.)
choose a transaction date                                                                      1/1/1712/31/171/1/18	enter an account title to record depreciation	enter a debit amount	enter a credit amount
	enter an account title to record depreciation	enter a debit amount	enter a credit amount
	(To record depreciation.)
	enter an account title to record interest	enter a debit amount	enter a credit amount
	enter an account title to record interest	enter a debit amount	enter a credit amount
	(To record interest.)
1/1/18	enter an account title to record second payment on January 1, 2018	enter a debit amount	enter a credit amount
	enter an account title to record second payment on January 1, 2018	enter a debit amount	enter a credit amount
	enter an account title to record second payment on January 1, 2018	enter a debit amount	enter a credit amount
	(To record second payment.)

Answer 1

1) Incremental Rate of Borrowing = 10%

PV of Minimum Lease Payments when annuity due = (A/i) * (1-1/(1+i)^n) (1+i) = (8479/0.1) * (1-1/(1.1)^5) *(1.1)= $35,357

As we can observe, the lease is a finance lease as its term covers more than 75% of its economic life (5 of 6 years).

Under Finance Lease, Lease Asset would be recognised at its fair value along with lease payable on the liabilities side.   
The leased asset shall be recorded at the present value of MLP (or fair value if it is lower).

Repayment Schedule
Year	Opening O/s	Interest	Principal	Closing O/s
0	35357	0	8479	26878
1	26878	2688	5791	21087
2	21087	2109	6370	14716
3	14716	1472	7007	7709
4	7709	771	7709	0

01-01-17	Machine	$      35,357
	To Lease Liability		$      35,357
	Recording the lease
01-01-17	Lease Liability	$         8,479
	To Bank		$         8,479
	Recording the first payment
31-12-17	Depreciation	$         7,071
	To Machine		$         7,071
	Being Depreciation charged for the year
31-12-17	Interest expense	$         2,688
	To Interest payable		$         2,688
	Recording the interest expense
01-01-18	Lease Liability	$         5,791
	Interest payable	$         2,688
	To Bank		$         8,479
	Recording the second payment