Lessor CBA Inc, leased a machine to lessee DF Co. The Lease is non-cancelable and requires DF to pay $6,000 per year, payable in advance, over a four-year period. CBA’s implicit interest rate (known to DF) is 6%. The lease term begins on January 1, 2020. The machine’s economic life is 7 years. The machine’s book value is $26,000 and fair value $30,000, with a guaranteed residual value of $10,000. The collectability of the lease payments is probable for the lessor. (Note: Present Value of an annuity of 1 for 4 periods at 6% is 3.46511, Present Value of an annuity due of 1 for 4 periods at 6% is 3.67301. Present Value of 1 of 4 periods at 6% is 0.79209) 1. Provide the journal entries required on the lessee’s books through January 1, 2020
2. Provide The journal entries required on the Lessor books through January 1,2020
Answer-1:
PV of lease payments ($6,000*3.67301) | $ 22,038 |
PV of residual value ($10,000*0.66506) | $ 6,651 |
Total PV of lease | $ 28,689 |
Date | Payment |
Interest expense |
Principle |
Liability Balance |
Jan.01, 2020 | $ 28,689 | |||
Jan.01, 2020 | $ 6,000 | $ 6,000 | 22,689 | |
Jan.01, 2021 | $ 6,000 | 1,361 | 4,639 | 18,050 |
Jan.01, 2022 | $ 6,000 | 1,083 | 4,917 | 13,133 |
Jan.01, 2023 | $ 6,000 | 788 | 5,212 | 7,921 |
Dec.31, 2023 | 475 | (475) | 8,397 | |
Dec.31, 2024 | 504 | (504) | 8,900 | |
Dec.31, 2025 | 534 | (534) | 9,434 | |
Dec.31, 2026 | 10000 | 566 | 9,434 | (0) |
In the Book of Lessee: | |||
Date | General Journal | Debit | Credit |
Jan.01, 2020 | Leased equipment | $ 28,689 | |
Lease liability | $ 28,689 | ||
Jan.01, 2020 | Lease liability | $ 6,000 | |
Cash | $ 6,000 | ||
Dec.31, 2020 | Depreciation expense | 4,098 | |
Accumulated depreciation-Capital lease | 4,098 | ||
Jan.01, 2021 | Lease liability | $ 4,639 | |
Interest expense | $ 1,361 | ||
Cash | $ 6,000 | ||
Dec.31, 2021 | Depreciation expense | 4,098 | |
Accumulated depreciation-Capital lease | 4,098 | ||
Jan.01, 2022 | Lease liability | $ 4,917 | |
Interest expense | $ 1,083 | ||
Cash | $ 6,000 | ||
Dec.31, 2022 | Depreciation expense | 4,098 | |
Accumulated depreciation-Capital lease | 4,098 | ||
Jan.01, 2023 | Lease liability | $ 5,212 | |
Interest expense | $ 788 | ||
Cash | $ 6,000 | ||
Dec.31, 2023 | Depreciation expense | 4,098 | |
Accumulated depreciation-Capital lease | 4,098 | ||
Dec.31, 2023 | Interest expense | $ 475 | |
Lease liability | $ 475 | ||
Dec.31, 2024 | Depreciation expense | 4,098 | |
Accumulated depreciation-Capital lease | 4,098 | ||
Dec.31, 2024 | Interest expense | $ 504 | |
Lease liability | $ 504 | ||
Dec.31, 2025 | Depreciation expense | 4,098 | |
Accumulated depreciation-Capital lease | 4,098 | ||
Dec.31, 2025 | Interest expense | $ 534 | |
Lease liability | $ 534 | ||
Dec.31, 2026 | Depreciation expense | 4,098 | |
Accumulated depreciation-Capital lease | 4,098 | ||
Dec.31, 2026 | Interest expense | $ 566 | |
Lease liability | $ 9,434 | ||
Cash | $ 10,000 |
Answer-2:
In the Book of Lessor: | |||
Date | General Journal | Debit | Credit |
Jan.01, 2020 | Lease receivable | $ 28,689 | |
Equipment | $ 28,689 | ||
Jan.01, 2020 | Cash | $ 6,000 | |
Lease receivable | $ 6,000 | ||
Dec.31, 2020 | Interest receivable | 1,361 | |
Interest revenue | 1,361 | ||
Jan.01, 2021 | Cash | $ 6,000 | |
Lease receivable | $ 6,000 | ||
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