Question

Advanced Accounting II Chapter 21 - Leases Problem 1. On January 1, 2019, Wilcox Inc. leased equipment from Zed Co. for use in the engineering The noncancelable lease is for 6 years with an unguaranteed residual value of $5.000 and the estimated economie life of the leased equipment is 10 years. The lease does not contain automatic title transfer or a bargam pum option Lease payments are $9,000 per year, payable ench December 31. The incremental borrowing rate for WHICON is 8 percent and Zed's implicit interest rate (known by Wilcox) is 6 percent. Wilcox uses straight-line depreciation for the equipment. To Zed, the equipment had a cost of $44,000 and fair value of $48,000. The collectability of the lease payments is probable for the lessor. Instructions Provide the necessary journal entries to record the transactions for the lessee and lessor for the period January 2019 through December 31, 2020.

Answer 1

Answer :

Wilcox Inc Journal Entries
Date	Particulars	Debit	Credit
01.01.2019	Leased equipment	44257
	To Lessor		44257
	(Being lease agreement recorded)
31.12.2019	Lessor	5459
	Financial charges	3541
	To Bank		9000
31.12.2019	Depreciation expense	7376
	To Leased equipment		7376
	(Being recording of the dep expense on leased asset)
31.12.2019	Profit and loss	10917
	To Finance charges		3541
	To Depreciation exp		7376
	(Being depreciation and financial charges written off)
31.12.2020	Lessor	5896
	Financial charges	3104
	To Bank		9000
	(Being recording of second annual lease payment)
31.12.2020	Depreciation exp	7376
	To Lease equipment		7376
	(Being recording depreciation expenses)
31.12.2020	Profit and loss	10480
	To Finance charges		3104
	To Depreciation expense		7376
	(Being recording of finance charges and depreciation are written off now)

Zed & Co Journal Entries
Date	Particulars	Debit	Credit
01.01.2019	Lease receivable	44257
	To Equipment		44257
	(Being recording of lease)
31.12.2019	Bank	9000
	To Lease receivable		5459
	To Finance income		3541
	(Being recording of first lease payment)
31.12.2019	Finance income	3541
	To Profit and loss		3541
	(Being recording of finance income of lease transferred to profit and loss A/c)
31.12.2020	Bank	9000
	To Lease receivable		5896
	To Finance income		3104
	(Being lease payment recorded)
31.12.2020	Finance income	3104
	To Profit and loss A/c		3104
	(Being financial income transferred to profit and loss a/c

Working Notes
1	Calculation of present value of minimum lease payment
	Year	Annual lease payment	Disc factor @6%	PV of lease payments
	1	9000	0.9434	8491
	2	9000	0.8900	8010
	3	9000	0.8396	7557
	4	9000	0.7921	7129
	5	9000	0.7473	6725
	6	9000	0.7050	6345
			Total	44257
2	Calculation of financial charges for lease
	31.12.2019
	Financial charges =			44257*8/100
				$ 3,541
	31.12.2020
	Financial charges =			(44257-5459)*8/100
	=			$ 3,10
3	Calculation of depreciation expense
	Depreciation =			(Cost - residual value)/useful life
	=			44257-0/6 years
	=			$ 7,376