Question

3. ABC Company, as lessee, enters into a lease agreement on January 1, 2018, for equipment. The following data are relevant to the lease agreement:

1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of $978,446 are due on January 1of each year.

2. The fair value of the equipment on January 1, 2018 is $3,500,000. The equipment has an economic life of 6 years with no salvage value.

3. ABC Company depreciates similar machinery it owns on the straight-line basis.

4. ABC Company’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments.

5. The following interest factors are provided:

Table Factors For Four Periods

Interest Rate

8%

10%

Future Value of 1

1.36049

1.46410

Present Value of 1

.73503

.68301

Future Value of Ordinary Annuity of 1

4.5061

4.6410

Present Value of Ordinary Annuity of 1

3.31213

3.16987

Future Value of an Annuity Due of 1

4.8666

5.1051

Present Value of an Annuity Due of 1

3.57710

3.48685

Required:   

1. Prepare journal entry to record lease on ABC Company books on January 1, 2018

2. Prepare journal entry to record the first lease payment on January 1, 2018.

3. Prepare a lease amortization schedule for ABC Company.

4. Prepare journal entry to record accrued interest at Dec 31, 2018

5. Prepare journal entry to record the depreciation on Dec 31, 2018

6. Prepare journal entry to record the lease payment of January 1, 2019

3. ABC Company, as lessee, enters into a lease agreement on January 1, 2018, for equipment. The following data are relevant to the lease agreement: 1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of $978,446 are due on January lof each year 2. The fair value of the equipment on January 1, 2018 is $3,500,000. The equipment has an economic life of 6 years with no salvage value. 3. ABC Company depreciates similar machinery it owns on the straight-line basis. 4. ABC Company's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments. 5. The following interest factors are provided: Table Factors For Four Periods Interest Rate Future Value of 1 1.36049 1.46410 Present Value of 1 7350368301 Future Value of Ordinary Annuity of l 4.5061 4.6410 Present Value of Ordinary Annuity of 3.31213 3.16987 Future Value of an Annuity Duc of 1 4 .8666 5.1051 Present Value of an Annuity Due of 1 3.57710 3.48685 Required: 1. Prepare journal entry to record lease on ABC Company books on January 1, 2018 2. Prepare journal entry to record the first lease payment on January 1, 2018 3. Prepare a lease amortization schedule for ABC Company. 4. Prepare journal entry to record accrued interest at Dec 31, 2018 5. Prepare journal entry to record the depreciation on Dec 31, 2018 6. Prepare journal entry to record the lease payment of January 1, 2019

Answer 1

Solution:

Lease Liability
PV of Lease Payments
Lease Payment	978446
No of periods	4
Interest rate per period	8.00%
PV annuity due Factor @ 8% for 4 years - 3.577097	3.57710
PV of Lease Payments (978446* PV factor for annuity due)	3499996

1&2

Journal Entries - In Lessee Books
01-01-2018	Right to use Asset	3499996
	Lease Liability		3499996
	(To record Liability)
	Lease Liability	978446
	Cash		978446
	(To record lease payments)

3.

Lease Amortisation Schedule
Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
01-01-2018				3499996
01-01-2018	978446.00		978446	2521550
01-01-2019	978446.00	201724	776722	1744828
01-01-2020	978446.00	139586	838860	905969
01-01-2021	978446.00	72477	905969	0

4.&5

31-Dec-18	Interest Expense	201724
	Interest Payable		201724
	( To record accrued interest)
	Amortization Expense	874999
	Right-to- Use Asset		874999
	(To record Amortization Expense (3499996/4)

6.

Jan 01 2019	Interest Payable	201724
	Interest Expense		201724
	(Reversing the entry)
01-01-2019	Interest Expense	201724
	Lease Liability	776722
	Cash		978446
	To record lease payment

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