Question

On January 1, 2021, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 6%. The contract calls for four rent payments of $14,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $98,000 and were expected to have a useful life of seven years with no residual value. Both firms record amortization and depreciation semiannually. (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.) Required: 1. Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease. 2. Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first year of the lease.

Answer 1

Nath-Langstrom Services Inc

Journal Entries

Date	Account	Debit ($)	Credit ($)
01-Jan-21	Right of use asset (see working note 1 below)	52,039.4
	Lease Liability		52,039.4
	(Entry to record lease liability)
30-Jun-21	Interest Expense (see working note 2 below)	1,561
	Lease Liability	12439
	Cash		14,000
	(Entry to record interest expense and lease payment)
30-Jun-21	Amortization Expense	12,439
	Right of use asset		12,439
	(Entry to record amortization expense)
31-Dec-21	Interest Expense (see working note 2 below)	1,118
	Lease Liability	12,812
	Cash		14,000
	(Entry to record interest expense and lease payment)
31-Dec-21	Amortization Expense	12,812
	Right of use asset		12,182
	(Entry to record amortization expense)

Working Notes:

1	Present Value of lease payments	=14000 x 3.7171*
		=52,039
	* Present value of an annuity of $1: n = 4, i = 3%.
2	Amortization Schedule
Date	Payment	Interest @ 3% on outstanding balance	Decrease in outstanding liability	Outstanding liability
01-Jan-21	0	0	0	52,039
30-Jun-21	14,000	1,561	12,439	39,600
31-Dec-21	14,000	1,188	12,812	26,788

Computer World Leasing

Journal Entries

Date	Account	Debit ($)	Credit ($)
30-Jun-21	Cash	14,000
	Lease Revenue		14,000
	(Entry to record amount received from lessee)
30-Jun-21	Depreciation Expense	7,000
	Accumulated Depreciation		7,000
	=((98000/7)/2)
	(Entry to record semi annual depreciation expense)
31-Dec-21	Cash	14,000
	Lease Revenue		14,000
	(Entry to record amount received from lessee)
31-Dec-21	Depreciation Expense	7000
	Accumulated Depreciation		7000
	=((98000/7)/2)
	(Entry to record semi annual depreciation expense)