Question

Cullumber Co. leased machinery from Young, Inc. on January 1, 2017. The lease term was for 8 years, with equal annual rental payments of $5,500 at the beginning of each year. In addition, the lease provides an option to purchase the machinery at the end of the lease term for $3,000, which Cullumber is reasonably certain it will exercise as it believes the fair value of the machinery will be at least $6,000. The machinery has a useful life of 10 years and a fair value of $45,000. The implicit rate of the lease is not known to Cullumber. Cullumber’s incremental borrowing rate is 6%.

Prepare Cullumber’s 2017 journal entries.

1/1/17

(To record lease liability)

1/1/17

(To record lease payment)

12/31/17

(To record interest expense)

12/31/17

(To record amortization of the right-of-use asset)

Answer 1

. Thank you

answer Date particulars Ocbil & Credit & to use Jon. 1 Right to use $30005 Lease liability $ 3B0BS Being to record lease liability) Jan. 1 Lease liability & 5500 Cash & ssoo (Boing to second payment of lease abit) Dec. 31 Inkesest expense & rass - Lease liabilig $ 1955 (Being to record interest Expense). Dec 31 Amosbization expense $3600 Right to use $ 3808 recond amortization expense. of right to use) (3806s/logen.) ܒܲܩܸܡܐܳܡܣܝ annual lease payment $ 5500 Bargain punchase option $3000 incremental Borrowing rake 6% Number of years present Value of annual lease hent & * 36203 (5500 + 5.5823814 * S 500) present value of Bargain purchase a § 1882 0.627412 x 3000 lease liabilly to be resounded x 30065 Interest expense ($300BS - $ssoo) x 6% = $ 1955 (Lease liability first lease payment) incremental Borrowing

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