Question

On January 1, 2018, QuickStream Communications leased telephone equipment from Digium, Inc. Digium’s cash selling price for the equipment is $1,987,838. The lease agreement specifies six annual payments of $430,000 beginning December 31, 2018, and at each December 31 thereafter through 2023. The six-year lease is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase by the higher of (a) the increase in the Consumer Price Index for the preceding year and (b) 2 percent. The CPI at the beginning of the lease is 100. Digium routinely leases equipment to other firms. The interest rate in these lease arrangements is 8%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
Prepare the appropriate journal entries for QuickStream to record the lease at its beginning date of January 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

No & Answer is complete but not entirely correct. Date General Journal Debit January 01, 2018 Right-of-use asset 1,989,773 Lease payable Credit 1,989,773 X

Answer 1

Answer:

Compute the present value of the lease on January 1, 2018 as follows:

	(A)	(B)	(A x B)
Date	Lease Payment	PVIF at 8%	Present value of lease payment
Dec. 31, 2018	430000	0.92593	398150
Dec. 31, 2019	438600	0.85734	376029
Dec. 31, 2020	447372	0.79383	355137
Dec. 31, 2021	456319	0.73503	335408
Dec. 31, 2022	465445	0.68058	316773
Dec. 31, 2023	474754	0.63107	299603
Total			2081100

Working notes:

It is given in the question that lease payments for each year will increase by the higher of (a) the increase in the Consumer Price Index for the preceding year and (b) 2 percent. However, CPI at the beginning of the lease has been given in the question but for the other years is not available. Therefore, lease payment for each year has been computed by multiplying the lease payment for previous year by 102%.

Due to rounding of the PVIF and the present value of the lease payments it is possible that the total present value of the lease payments may differ by a few dollars.

Now, the journal entry to record the lease at its beginning date of January 1, 2018 will be prepared by debiting Lease Asset and crediting Lease Liability by $2081100.

Account Title	Debit ($)	Credit ($)
Lease Asset - Telephone Equipment	2,081,100
Lease Liability		2,081,100