Question

Python Company leased equipment from Hope Leasing on January 1, 2020. Hope recently purchased the equipment at a cost of $222,664.

Other information:

Lease term                              3 years

Annual payments                    $80,000 on January 1 each year

Life of asset                            3 years

Fair value of asset                   $222,664

Implicit interest rate               8%

Incremental rate                      8%

There is no expected residual value.

Required:

1. Show how Hope determined the $80,000 annual lease payments.
2. Prepare appropriate journal entries for Hope for 2020 and 2021. Round your answers to the nearest whole dollar amounts. Prepare an amortization schedule for Hope
3. Prepare appropriate journal entries for Python for 2020 and 2021. Assume straight-line depreciation and a December 31 year-end. Round your answers to the nearest whole dollar amounts.

Answer 1

THE INFORMATION GIVEN IN THE QUESTION ARE AS FOLLOWS
LEASE TERM	3 YEAR
ANNUAL PAYMENT	$80,000
LIFE OF ASSET	3 YEAR
FAIR VALUE OF ASSET	$ 222,664
IMPLICIT INTEREST RATE	8%
INCREMENTAL RATE	8%
ANNUAL LEASE PAYMENT PMT(0.08,2,-142664,0)	80001.58 Approx

Capital Lease Accounting - Interest Charges
		Opening	Interest 8%	Payment	Closing
	1/1/21	222664	0	80000	142664
	2/31/21	142664	11413	80000	74077
	12/31/21	74077	5923	80000	0

JOURNAL ENTRY IN THE BOOKS OF PYTHON COMPANY
DATE	PARTICULARS	R/F	DEBIT	CREDIT
01-Jan-20	LEASED ASSET A/C DR.		$ 222664
	LEASE PAYABLE A/C			$ 222664
01-Jan-20	LEASE PAYABLE A/C DR.		$    80,000
	CASH A/C			$    80,000
31-Dec-20	INTEREST EXPENSE A/C DR.		$    11413.12
	INTEREST PAYABLE A/C			$    11413.12
31-Dec-20	DEPRECIATION EXPENSE A/C DR.		$    74221.333
	ACCUMULATED DEPRECIATION A/C (222664/3)			$    74221.33

JOURNAL ENTRY IN THE BOOKS OF PYTHON COMPANY 2021
DATE	PARTICULARS	R/F	DEBIT	CREDIT
01-Jan-21	INTEREST PAYABLE A/C		$ 11413.12
	LEASE PAYABLE A/C		$ 68586.88
	CASH A/C			$ 80,000
31-Dec-21	INTEREST EXPENSE A/C DR.		$ 5926.1696
	INTEREST PAYABLE A/C			$ 5926.1696
31-Dec-21	DEPRECIATION EXPENSE A/C DR.(222664/3)		$    74221.33
	ACCUMULATED DEPRECIATION A/C			$    74221.33