Question

On January 2, 2020, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $160,000 each, payable beginning January 2, 2020. Brick Co. agrees to guarantee the $150,000 residual value of the asset at the end of the lease term. The expected value of the residual value is $50,000. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 2, 2020 to record the lease? PV Annuity Due PV Ordinary Annuity. PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092 598,449 a. Right-of-Use Asset Lease Liability b. Right-of-Use Asset 598,449 758,449 Cash 160,000 598,449 689,940 Lease Liability C. Right-of-Use Asset Cash Lease Liability d. Right-of-Use Asset Cash Lease Liability 160,000 529,940 707,342 160,000 547,342

Answer 1

Solution: The Answer is Option B

Date	Account title and explanation	Debit	Credit
Jan. 2, 2020	Right-of-Use asset	$           758,449
	Cash		$        160,000
	Lease liability [758449 - 160000]		$        598,449
	[To record lease asset and liability]

Calculation of Right-of-Use asset:

1) Present Value of Annuity Payments = 160000 * 4.31213 = $ 689941

2) Present Value of Residual Value = [150000-50000] * 0.68508 = $ 68508

3) Right-of-Use asset = $ 758449 [ $ 689941 + $ 68508]