Question

Exercise 15-16 (Algo) Lessee; operating lease [LO15-4] Baillie Power leased high-tech electronic equipment from Courtney Leasing on January 1, 2021. Courtney purchased the equipment from Doane Machines at a cost of $253,500, its fair value. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Related Information: Lease term 2 years (8 quarterly periods) $18,500 at Jan. 1, 2021, and at Mar. 31, June 30, Sept. 30, and 31 thereafter Quarterly lease payments Economic life of asset Interest rate charged by the lessor 5 years 12% Required: Prepare a lease amortization schedule and appropriate entries for Baillie Power from the beginning of the lease through December 31, 2021. December 31 is the fiscal year end for each company. Appropriate adjusting entries are recorded at the end of each quarter.

Answer 1

Answer:

Lease balance at the beginning=Present value of lease payments

Interest rate=12%

Lease is payable Quarterly, Interest per lease period=12*1/4=3%

Total quarterly period=2 years*4 quarter periods per year=8 Quarter periods

lease is payable at the beginning of the period

So,use PVAD of $1 at 3% for 8 years

Lease balance at the beginning=18500*PVAD of $1 at 3% for 8 years=18500*7.23028=$ 133760

Lease amortization schedule
Payment date	Lease payments	Effective interest	Decrease in balance	Lease balance
	a	b=Beg.d* 3%	c=a-b	d=Beg.d- c
01/01/2021.				133760
01/01/2021.	18500	0	18500	115260
		(Note:1)
03/31/2021.	18500	3458	15042	100218
06/30/2021.	18500	3007	15493	84725
09/30/2021.	18500	2542	15958	68767
12/31/2021.	18500	2063	16437	52330
03/31/2022.	18500	1570	16930	35400
06/30/2022.	18500	1062	17438	17962
09/30/2022.	18500	539	17961	0
Note:1 Interest at the beginning of lease=0

Journal entries:
Date	General journal	Debit	Credit
Jan 01,2021	Right-of-use of asset	133760
	Lease payable		133760
	(To record lease at the beginning)
Jan 01,2021	Lease payable	18500
	Cash		18500
	(To record lease payment)
Mar 31,2021	Interest expense	3458
	Lease payable	15042
	Cash		18500
	(To record lease payment)
Mar 31,2021	Amortization expense	15042
	Right-of-use of asset		15042
	(To record amorization of leased asset)
June 30,2021	Interest expense	3007
	Lease payable	15493
	Cash		18500
	(To record lease payment)
June 30,2021	Amortization expense	15493
	Right-of-use of asset		15493
	(To record amorization of leased asset)
Sep 30,2021	Interest expense	2542
	Lease payable	15958
	Cash		18500
	(To record lease payment)
Sep 30,2021	Amortization expense	15958
	Right-of-use of asset		15958
	(To record amorization of leased asset)
Dec 31,2021	Interest expense	2063
	Lease payable	16437
	Cash		18500
	(To record lease payment)
Dec 31,2021	Amortization expense	16437
	Right-of-use of asset		16437
	(To record amorization of leased asset)