Question

Eastern Edison Company leased equipment from Low-Tech Leasing on January 1, 2018. Low-Tech recently purchased the equipment at a cost of $213,369 Other information: Lease term Annual payments Life of asset Fair value of asset 3 years $78,000 on January 1 each year 3 years $213,369 10% 10% Implicit interest rate Incremental rate There is no expected residual value. Required: Prepare appropriate journal entries for Low-Tech Leasing for 2018. Assume a December 31 year-end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amounts.) View transaction list Journal entry worksheet Record the entry at the inception of the lease Note: Enter debits before credits Date General Journal Debit Credit January 01, 2018

Answer 1

DATE GENERAL JOURNAL DEBIT CREDIT

JAN 1 2018	LEASE RECEIVABLE A/C DR.			2,13,330.00	$
	TO ASSET A/C				2,13,330.00	$
JAN 1 2018	BANK A/C DR.			78,000.00	$
	TO LEASE RECEIVABLE A/C				78,000.00	$
JAN 1 2019	BANK A/C DR.			78,000.00	$
	TO LEASE RECEIVABLE A/C				64,467.00	$
	TO FINANCE CHARGES A/C				13,533.00	$

NOTE: IT IS ASSUMED THAT THE FIRST INSTALMENT IS PAID ON JAN 1 2018 AS THE INSTALMENTS ARE PAID ON JAN 1 EVERY YEAR .

PRESENT VALUE OF MINIMUM LEASE PAYMENTS(MLP)
YEAR	MLP	PV FACTOR @10%		PRESENT VALUE
0	78,000.00	1.00		78,000.00
1	78,000.00	0.91		70,902.00
2	78,000.00	0.83		64,428.00
			TOTAL	2,13,330.00 $

NOTE: WE CALCULATE THE PRESENT VALUE OF MINIMUM LEASE PAYMENTS SO THAT WE CAN DETERMINE WHETHER THE FAIR VALUE OR THE PRESENT VALUE IS LOWER .

NOTE: HERE THE PRESENT VALUE IS LOWER , THEREFORE THAT IS TAKEN . AS THE PRESENT VALUE AND FAIR VALUE ARE APPROXIMATELY SIMILAR IT IS A FINANCIAL LEASE.

CALCULATION OF FINANCE CHARGES
YEAR	TOTAL PAYMENT		INTEREST	PRINCIPAL	PRINCIPAL OUTSTANDING
0	78,000.00		-	78,000.00	1,35,330.00	$
1	78,000.00		13,533.00	64,467.00	70,863.00	$
2	78,000.00		7,137.00	70,863.00	-	$