Problem 21-04
Splish Inc. was incorporated in 2019 to operate as a computer
software service firm, with an accounting fiscal year ending August
31. Splish’s primary product is a sophisticated online
inventory-control system; its customers pay a fixed fee plus a
usage charge for using the system.
Splish has leased a large, Alpha-3 computer system from the
manufacturer. The lease calls for a monthly rental of $46,000 for
the 144 months (12 years) of the lease term. The estimated useful
life of the computer is 15 years.
All rentals are payable on the first day of the month beginning
with August 1, 2020, the date the computer was installed and the
lease agreement was signed. The lease is non-cancelable for its
12-year term, and it is secured only by the manufacturer’s chattel
lien on the Alpha-3 system.
This lease is to be accounted for as a finance lease by Splish, and
it will be amortized by the straight-line method. Borrowed funds
for this type of transaction would cost Splish 6% per year (0.50%
per month). Following is a schedule of the present value of an
annuity due for selected periods discounted at 0.50% per period
when payments are made at the beginning of each period.
Periods |
Present Value of an Annuity Due |
|
1 | 1.000 | |
2 | 1.995 | |
3 | 2.985 | |
143 | 102.497 | |
144 | 102.987 |
Prepare all entries Splish should have made in its accounting
records during August 2020 relating to this lease. Remember, August
31, 2020, is the end of Splish’s fiscal accounting period, and it
will be preparing financial statements on that date. Do not prepare
closing entries.
Date |
Account Titles and Explanation |
Debit |
Credit |
August 1, 2020August 31, 2020 |
|||
(To record the lease.) |
|||
August 1, 2020August 31, 2020 |
|||
(To record lease payment.) |
|||
August 1, 2020August 31, 2020 |
|||
(To record interest.) |
|||
August 1, 2020August 31, 2020 |
|||
(To record amortization.) |
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Problem 21-04 Splish Inc. was incorporated in 2019 to operate as a computer software service firm,...
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