Question

On January 1, 2017, Whispering Company contracts to lease equipment for 5 years, agreeing to make a payment of $879,904 at the beginning of each year, starting January 1, 2017. The leased equipment is to be capitalized at $4,000,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Whispering’s incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Whispering. Title to the equipment transfers to Whispering at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.

Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Answer 1

Solution:

Journal Entries -Whispering Company
Date	Particulars	Debit	Credit
31-Dec-17	Amortization expenses Dr ($4,000,000*40%)	$1,600,000.00
	To Right of use assets		$1,600,000.00
	(To record amortization expense)
31-Dec-17	Interest expense Dr [($4,000,000 - $879,904)*5%]	$156,005.00
	To Lease Liability		$156,005.00
	(To record interest expense)