Question

On April 1, 2020, Voila Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Voila to make annual payments of $8,668 at the beginning of each year, starting April 1, 2020. The machine has an estimated useful life of 6 years and a fair value at the inception the lease of $39,249. The machine reverts back to the lessor at the end of the lease term. Voila uses the straight-line method of depreciation for all of its plant assets. Voila's incremental borrowing rate is 10%, the same as the lease's implicit rate.

a) What type of lease is this? Explain in detail how you determined the type of lease.

b) Compute the present value of the minimum lease payments.

c) Prepare an amortization table for the lease arrangement

d) Record the journal entries at the inception of the lease

Answer 1

Period	Lease Payment	PV Factor @10%	Present Value $
1	8,668	1	8,668
2	8,668	0.90909	7,880
3	8,668	0.82645	7,164
4	8,668	0.75131	6,512
5	8,668	0.68301	5,920
Total	43,340		36,144

a.) The lease is Capital lease because the present value of minimum lease payments is 92.09% ( 36,144 / 39,249 ) of fair value of machine which satisfy the condition of C40present value of the lease payments is greater than or equal to 90% of the asset’s fair market value.

b.)

Present value of the minimum lease payments

$ 36,144

c.)	Date	Lease payment	Interest expense @10%	Reduction in	Lease liability
				lease liability	Balance
	April .1,2020				36,144
	April .1,2020	8,668	-	8,668	27,476
	April .1,2021	8,668	2,748	5,920	21,556
	April .1,2022	8,668	2,156	6,512	15,044
	April .1,2023	8,668	1,504	7,164	7,880
	April .1,2024	8,668	788	7,880	0
d.)	Date	Account Titles	Debit $	Credit $
	April .1,2020	Right of use assets	36,144
		Lease liability		36,144
	April .1,2020	Lease liability	8,668
		Cash		8,668