Question

On January 1, 2019. B enters into a 3-year non-cancer 19, B enters into a 3-year non-cancelable lease agreement for year useful life. The lease requires annual payments of $30,000 on Teach year. At the end of the lease term, the asset will revert back to an asset with a 4-year useful li December 31st of each year. At the en the lessor B's incremental borrowing rate is 10%. Relevant present value factors are as follows: PV for ordinary annuity, 3 periods, 10% 2.48685 PV for annuity due, 3 periods, 10% 2.73554 INSTRUCTIONS: repare the journal entry for the signing of the lease on January 1, 2018 9. Prepare the required journal entries on December 31, 2019.

Answer 1

Solution 3a:

% of life covered by lease period = 3/4 = 75%

As lease covered 75% of asset useful life therefore same will be classified under finance lease.

Present value of lease payments = $30,000 * Cumulative PV factor at 10% for 3 periods of ordinary annuity

= $30,000 * 2.48685 = $74,606

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-19	Leased Asset Dr	$74,606.00
	To Lease Payable		$74,606.00
	(To record right of use asset)

Solution 3b:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-19	Interest expense Dr	$7,461.00
	Lease payable Dr	$22,539.00
	To Cash		$30,000.00
	(To record lease payment)