Question

Diablo Company leased a machine from Juniper Corporation on January 1, 2018. The machine has a fair value of $14,000,000. The lease agreement calls for three equal payments at the end of each year in the amount of $5,828,886. The useful life of the machine was expected to be three years with no residual value. The appropriate interest rate for this lease is 12%.

Required: 1. 2. & 3. Prepare the appropriate journal entry. (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 amounts.)

Answer 1

Amount of each lease payment $5,828,886 Diablo Company Journal entry Particulars Debit ($) Credit ($) 14,000,000 Lease payable 14,000,000 (Lease asset created) 1,680,000 4,148,886 Interest expense (14,000,000*12%) Lease payable (5,828,886-1,680,000) (Interest for the 1st year) Interest expense 12% * (14,000,000-4,148,886) Cash 5,828,886 1,182,134 4,646,752 Lease payable (5,828,886-1,182,134) 5,828,886 (Interest for the 2nd year)