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

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A B D E F G H K 1 2 3 4 Lease term Annual payments Life of asset Fair value of asset Implicit interest rate Incremental rate 3 years 80000 3 years 222664 8% Date Liability 1/1/2020 12/31/2020 12/31/2021 Payment Interest Closing value 222664 80000 0 142664 142664 80000 11413.12 74077.12 74077.12 80000 5926.1696 3.2896 5 6 7 8% 8 9 Annual Payment 80001.58 Approx 10 11 12 Journal Entries 2020 Date Account Explanation Debit Credit 1/1/2020 Leased asset 222664 Lease payable 222664 13 Journal Entries 2021 Date Account Explanation Debit Credit 1/1/2021 Interest Payable 11413.12 Lease Payable 68586.88 Cash 80000 14 15 16 80000 1/1/2020 Lease payable Cash 17 80000 5926.1696 12/31/2021 Interest Expense Interest Payable 18 5926.1696 19 11413.12 12/31/2020 Interest Expense Interest Payable 20 11413.12 74221.33333 12/31/2021 Depreciation Accumulated Depreciation 21 74221.33333 22 74221.33333 12/31/2020 Depreciation Accumulated Depreciation 23 74221.33333 24

For calculation ref:

A B С D E F G H J K 1 2 3 years 3 80000 years 4 5 6 Lease term Annual payments Life of asset Fair value of asset Implicit interest rate Incremental rate 3 222664 0.08 0.08 Date Liability 43831 =D5 |44196 I=K4 1=G5+365 =K5 Payment Interest Closing value =D3 0 =H4-14 =14 =H5*8% =H5+J5-15 =15 =H6*8% =H6+J6-16 7 8 9 Annual Payment =PMT(D7,D4-1,-(D5-D3),0) Approx 10 11 12 Credit Date Credit Journal Entries 2020 Date Account Explanation Debit =G4 Leased asset =D5 Lease payable 13 =B22+1 Journal Entries 2021 Account Explanation Debit =C20 =E20 Lease Payable =J15-113 Cash 14 =D5 15 1=D3 16 =G4 =C14 =D3 17 Cash =D16 =G6 =J6 = Interest Expense Interest Payable 18 =117 =G5 =J5 19 20 Interest Expense Interest Payable =D19 =G17 =D5/3 Depreciation Accumulated Depreciation =120 21 22 =B19 Depreciation =D5/3 Accumulated Depreciation 23 =D22 24 25