Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Oriole 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, 2020, is $70,000.
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 $7,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $21,827.58 to the lessor, beginning on January 1, 2020.
5.		The lessee’s incremental borrowing rate is 4%. The lessor’s implicit rate is 3% and is unknown to the lessee.
6.		Oriole uses the straight-line depreciation method for all equipment.

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Prepare all of the journal entries for the lessee for 2020 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 2 decimal places, e.g. 5,265.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record the lease on January 1 2020	enter a debit amount	enter a credit amount
	(To record the lease)
1/1/2012/31/20	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record lease liability on January 1 2020	enter a debit amount	enter a credit amount
	(To record lease liability)
1/1/2012/31/20	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title for the journal entry on December 31 2020	enter a debit amount	enter a credit amount

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Answer 1

Journal Entry: Date Jan. 1. 2020 Credit Debit $63,594.00 Account Titles and Explanation Leased Equipment - Capital lease Lease liability (To record lease liability) $63,594.00 Jan. 1, 2020 $21.827.58 Lease liability Cash (To record lease Payment) $21.827.58 Dec.31, 2020 Interest expense $1,252.99 $1,252.99 (To record interest expense) Dec 31, 2020 Depreciation expense ($63,594 / 5 years) $12.718.80 Accumulated depreciation (To record amortization of the right of use asset) $12.718.80 Workings: Date Lease Amortization Schedule Reduction Annual Interest of Lease Lease (3%) on Lease Liability Payment Liability Liability $63,594.00 $21.827.58 $21.827.58 $41,766.42 $21.827.58 $1,252.99 $20.574.59 $21,191.83 $21.827.58 $635.75 $21,191.83 $0.01 $65,482.74 $1.888.75 $63,593.99 1/1/20 1/1/20 1/1/21 1/1/22 $63,594 Workings: Present Value of minimum lease payments: (Annual Rental Payment * Present Value of an annuity) ($21.827.58 * 2.91347) Present Value of an annuity due (n = 3, I = 3%) = 2.91347