Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Crane Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2017, is $49,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $5,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $15,438 to the lessor, beginning on January 1, 2017.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Crane uses the straight-line depreciation method for all equipment.

Assume that the expected residual value at the end of the lease is $10,000, such that the payments are $13,898.

PVAD (4%,3)= 2.88609

Prepare all of the journal entries for the lessee for 2017 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 0 decimal places, e.g. 5,265. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Answer -

Journal of Crane Company

Date	General Journal	Debit ($)	Credit ($)
January 1, 2017	Lease Equipment Lease Liability [$15438 * 2.85941] (To record the lease)	44144 -	- 44144
January 1, 2017	Lease Liability Cash (To record annual rental payment)	15438 -	- 15438
December 31, 2017	Interest Expense [($44144 - $15438) * 5%] Lease liability [Difference] Cash (To record interest expense and annual rental payment )	1435 14003 -	- - 15438
December 31, 2017	Depreciation Expense [($44144 - $10000) / 3 years] Accumulated Depreciation (To record depreciation expense)	11381 -	- 11381