Question

On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable at the beginning of each year $50,000 Useful life of machine 8 years Day's incremental borrowing rate 15% Implicit interest rate in lease (known by Day) 12% Present value of annuity of 1 in advance for 6 periods at 12% 4.61 15% 4.35 The lease passes ownership of the machine to Day at the termination of the lease. The cost of the machine on Parr's accounting record is $375,500. Hint: see bottom of pages 839 - 841 (chapter 15) of your text book for an illustrative example. Please write your answers in the space provided in each question.

Answer 1

2.

Solution

The above sttaed lease is capital lease as the ownership is transferred to the lessee.

3.

following payment will be made
Lease payment to be done	$50,000	4.61	230500	(50000*4.61)

Particulars			Amount(in$)	Amount(in $)
MACHINE a/C    DR…..			230500
	To Lease liability A/c			230500
(to initially recognise the lease liability & correponding asset)

4.

Lease liability A/c dr…		50000
	to Cash A/c		50000
(to record lease payment)

5.

Interest expense A/c ..dr			27660
	To lease liability A/c			27660
(to record interest expense and accrete the lease liability using effective interest rate )
(230500*.12)

6.

lease liability at the end of 2019
$208,160	(230500+27660-50000)