Question

George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $299,140, and its unguaranteed residual value at the end of the lease term is estimated to be $20,000. National will pay annual payments of $40,000 at the beginning of each year. George incurred costs of $180,000 in manufacturing the equipment and $4,000 in sales commissions in closing the lease. George has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 8%. National Airlines has an incremental borrowing rate of 8%.

Compute the amount of the initial lease liability. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Discuss the nature of this lease in relation to the lessee. This is a finance lease Compute the amount of the initial lease liability. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) The amount of the initial lease liability

Prepare a 10-year lease amortization schedule. (Round answers to 0 decimal places e.g. 58,970.)

Prepare all of the lessee’s journal entries for the first year. Assume straight-line depreciation. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,970.)

Answer 1

1	The amount of the Initial lease liability	289,876
2	Beginning of Year	Amount Lease Payment	Interest on Lease Liability	Reduction of Lease Liability	Lease Liability
	Initial PV	-	-	-	289,876
	1	40,000	-	40,000	249,876
	2	40,000	19,990	20,010	229,866
	3	40,000	18,389	21,611	208,255
	4	40,000	16,660	23,340	184,916
	5	40,000	14,793	25,207	159,709
	6	40,000	12,777	27,223	132,486
	7	40,000	10,599	29,401	103,085
	8	40,000	8,247	31,753	71,331
	9	40,000	5,707	34,293	37,038
	10	40,000	2,962	37,038	(0)
3	Accounts Titles and Explanation	Debit	Credit
	Interest Expense	19,990
	Lease Liability		19,990
	(To record of annual interest on lease obligation)
	Amortization Expense	24,156		(289,876/12)
	Right-to-use Asset		24,156
	(To record amortization expense for first year)