Question

Dete Account Titles and Explanation Dehit Credit Exercise 21A-1 a DU Journeys enters into an agreement with Traveler Inc. to lease a car on December 31, 2016. The following information relates to this agreement. 12/31/16 1231/17 The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The 1. remaining economic life of the car is 3 years, and it is expected tohave no residual value at the end of the To record interest expense) lease term 2. The fair value of the car was $15,000 at commencement of the lease. 12/31/17 3. Annual payments are required to be made on December 31 a the end of each year of the lease, beginning December 31, 2017. The first payment is to be of an amount of $5,552.82, with each payment increasing by a constant rate of 5% from the previous payment (i.e., the second payment will be $5,830.46 and the third and final payment will be $6,121.99) CTo record amortizaton of the right of use asset) 4. DU Journeys' incremental borrowing rate is 8%. The rate implicit in the lease is unknown. 12/31/18 5. DU Journeys uses straight-line depreciation for all similar cars. Prepare DU Journeys' journal entries for 2016, 2017, and 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as dis- played in the factor table provided and round final an- swers to 2 decimal places, e.g. 5,275.25.) To record interest expense) (To record amortization of the right-of-use asset)

Answer 1

Journal

Date	Account Name	Debit	Credit
12/31/16	Car on lease	$15000
	Lease liability		$15000
12/31/17	Lease liability	4352.82
	Interest expense (15000 x 0.08)	1200
	Cash		5552.82
	(To record interest expense)
12/31/17	Depreciation expense	5000
	Car on lease		5000
	(To record amortization of the right-of-use asset)
12/31/18	Lease liability	4978.69
	Interest expense [(15000-4352.82) x 0.08]	851.77
	Cash		5830.46
	(To record interest expense)
12/31/18	Depreciation expense	5000
	Car on lease		5000
	(To record amortization of the right-of-use asset)

Lease liability to be recognized initially = (5552.82 x PVF_8%,1) + (5830.46 x PVF_8%,2) + (6121.98 x PVF_8%,3)

= (5552.82 x 0.92593) + (5830.46 x 0.85734) + (6121.98 x 0.79383)

= $15000