Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Plote Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2017, is $80,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $25,563 to the lessor, beginning on January 1, 2017.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Plote uses the straight-line depreciation method for all equipment.

a. Prepare an amortization schedule that would be suitable for the lessee for the lease term.

b. Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.

Answer 1

a.)	Date	Lease Payment	PV Factor @5%	Present Value $
	January 1,2017	25,563	1	25,563
	January 1,2018	25,563	0.95238	24,346
	January 1,2019	25,563	0.90703	23,186
	Total	76,689		73,095
	Amortization
	Schedule
	Date	Lease Payment	Interest Expense	Reduction in	Lease
			@ 5%	Lease Liability	Liability
	January 1,2017				73,095
	January 1,2017	25,563	-	25,563	47,532
	January 1,2018	25,563	2,377	23,186	24,346
	January 1,2019	25,563	1,217	24,346	0
	Total	76,689	3,594	73,095
b.)	Date	Account Titles	Debit $	Credit $
	January 1,2017	Right of use asset	73,095
		Lease liability		73,095
	January 1,2017	Lease liability	25,563
		Cash		25,563
	December 31,2017	Interest Expense	2,377
		Interest Payable		2,377
	December 31,2017	Amortization Expense	24,365
		Right of use asset		24,365
		(73,095 / 3 )
	January 1,2018	Lease liability	23,186
		Interest Payable	2,377
		Cash		25,563
	December 31,2018	Interest Expense	1,217
		Interest Payable		1,217
	December 31,2018	Amortization Expense	24,365
		Right of use asset		24,365
		(73,095 / 3 )