Question

On January 1, 2016, Muske Trucking Company leased a semitractor and trailer for five years. Annual payments of $28,300 are to be made every December 31 beginning December 31, 2016. Interest expense is based on a rate of 8%. The present value of the minimum lease payments is $112,994 and has been determined to be greater than 90% of the fair market value of the asset on January 1, 2016. Muske uses straight-line depreciation on all assets.

a. prepare a table similar to show the five-year amortization of the lease obligation.

b. prepare the journal entry for the lease transaction on January 1, 2016

c. prepare all necessary journal entries on December 31, 2017

d. prepare the balance sheet presentation as of January 1, 2018, for the leased asset and the lease obligation.

Answer 1

Year Rentals DR@8% Present Value 26,204 31st Dec 2016 28,300 0.926 28,300 0.857 31st Dec 2017 24,263 31st Dec 2018 28,300 0.794 22,465 28,300 0.735 20,801 31st Dec 2019 31st Dec 2020 28,300 0.681 19,261 Total 1,12,994 As the Present Value of the Lease Rentals covers more than 90% of the Fair Value of the asset, it will be considered as Financial Lease Table showing Amortsation of Lease Obligation (a) Opening Balance Interest@8% Closing Balance Instalment Year 31st Dec 2016 9,040 93,734 1,12,994 28,300 31st Dec 2017 93,734 7,499 28,300 72,933 50,468 31st Dec 2018 72,933 5,835 28,300 31st Dec 2019 50,468 4,037 28,300 26,205 31st Dec 2020 26,205 2,095 28,300 Journal Entry on Jan 01,2016 Particulars (b) Debit Credit Asset on Lease Account To Lease Liability (Being asset recorded on lease) 1,12,994 1,12,994 Necessary Journal Entries on Dec 31,2017 Particulars Debit Credit Finance Charges Account To Lease Liability (Being Interest Charged) 7499 7,499 Lease Liability To Cash/Bank (Being instalment paid at the end of Year 2) 28300 28,300 Depreciation Account To Asset on Lease (Being depreciation charged on asset) 22,599 22,599 Profit & Loss Account To Finance Charges Account To Depreciation (Being Dep & Finance Charges transferred to P&L Account)2 30,098 7,499 22,599 Presentation in Balance Sheet as on Jan 01, 2018 for Leased Asset & Lease Obligation (d) Balance Sheet Particulars Amount($) Assets Non-Current Assets Assets on Lease 67,796 Particulars Equities & Liabilities Non-current Liabilities Lease Liability Amount 50,468 Current Liability 22,465 Lease Liability of $28300 will be paid by the end of the next year, it will be considered as Comment Current Liability net finance charges, so Current liability figure will be 28,300 minus 5,835 is equals to $22,465 Working Value - Original 112994 Note Less. Dep for 2016 22599 Less. Dep for 2017 22599 Written Down Value 67796