Question

On January 1, 2020, Crane Corp., which uses IFRS, signs a 10-year, non-cancellable lease agreement to lease a specialty lathe from Liu Inc. The following information concerns the lease agreement.

1.		The agreement requires equal rental payments of $95,654 beginning on January 1, 2020.
2.		The lathe’s fair value on January 1, 2020, is $610,000.
3.		The lathe has an estimated economic life of 12 years, with an unguaranteed residual value of $16,000. Crane Corp. depreciates similar equipment using the straight-line method.
4.		The lease is non-renewable. At the termination of the lease, the lathe reverts to the lessor.
5.		Crane’s incremental borrowing rate is 11% per year. The lessor’s implicit rate is not known by Crane Corp.
6.		The yearly rental payment includes $2,339.70 of executory costs related to insurance on the lathe.

Click here to view the factor table PRESENT VALUE OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1.

Assume that Crane’s fiscal year end is May 31. Prepare the journal entries on Crane Corp.’s books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the calendar years 2020 and 2021. Crane does not prepare reversing entries. (Credit account titles are automatically indented when the 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 2 decimal places, e.g. 52.75.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20	Insurance Expenses
	Right of Use Asset	enter a debit amount	enter a credit amount
	Prepaid Insurance	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	Cash	enter a debit amount	enter a credit amount
	(To record lease payment.)
5/31/20	Depreciation Expenses	enter a debit amount	enter a credit amount
	Accumulated Depreciation-Right of Assets	enter a debit amount	enter a credit amount
	(To record depreciation expense.)
5/31/20	interest expenses	enter a debit amount	enter a credit amount
	Lease Liability	enter a debit amount	enter a credit amount
	(To record interest.)
12/31/20	Insurance Expenses	enter a debit amount	enter a credit amount
	Prepaid Insurance	enter a debit amount	enter a credit amount
	(To record expired insurance.)
1/1/21	Insurance Expenses	enter a debit amount	enter a credit amount
	Interest Expenses	enter a debit amount	enter a credit amount
	Prepaid Insurance	enter a debit amount	enter a credit amount
	Lease liability	enter a debit amount	enter a credit amount
	cash	enter a debit amount	enter a credit amount
	(To record lease payment.)
5/31/21	Depreciation expenses	enter a debit amount	enter a credit amount
	Accumulated Depreciation	enter a debit amount	enter a credit amount
	(To record depreciation expense.)
I5/31/21	Interest expenses	enter a debit amount	enter a credit amount
	Lease Liability	enter a debit amount	enter a credit amount
	(To record interest.)
12/31/21	Insurance Expenses	enter a debit amount	enter a credit amount
	Prepaid Insurance	enter a debit amount	enter a credit amount
	(To record expired insuranc

Answer 1

Crane Corp
	Capitalized amount of the lease:
	Yearly Payment	$                      95,654
	Less: Executory cost	$                      -2,340
	Minimum annual lease payment	$                      93,314
	P.V of annuity due 11% for 10 Years	$                   6.53705
	P.V of minimum lease payment($93314*6.53705)	$                  6,10,000
Journal Entries
Date	Account Title & Explanatio	Debit	Credit
01-01-2020	Right of use Assets	$                  6,10,000
	To Lease Liability		$                                        6,10,000
	(Amount of Lease Liability)
01-01-2020	Insurance Expense	$                        2,340
	Lease Liability	$                      93,314
	To Cash		$                                           95,654
	(Amount paid for Insurance Expense and lease liability)
31-12-2020	Depreciation Expense=($610000/10)	$                      61,000
	To Accumulated Depreciation		$                                           61,000
	(Amount of Depreciation)
31-12-2020	Interest Expense	$                      56,835
	To Interest Payable		$                                           56,835
	(Amount of Interest Payable)
01-01-2021	Insurance Expense	$                        2,340
	Interest Payable	$                      56,835
	Lease Liability	$                      36,479
	To Cash		$                                           95,654
	(Amount paid for Executory cost,Interest and lease liability)
31-12-2021	Depreciation Expense	$                      61,000
	To Accumulated Depreciation-Right to use assets		$                                           61,000
	(Amount of Depreciation)
31-12-2021	Interest Expense	$                      52,823
	To Interest Payable		$                                           52,823
	(Amount of Interest Payable)
Lease Amortization Schedule
Date	Annual Payment less Executory Costs	Interest 11%	Reducton of lease liability	Lease Liability
01-01-2020				$              6,10,000
01-01-2020	$                                                                                                           93,314	$                               -	$                                           93,314	$              5,16,686
01-01-2021	$                                                                                                           93,314	$                      56,835	$                                           36,479	$              4,80,207
01-01-2022	$                                                                                                           93,314	$                      52,823	$                                           40,492	$              4,39,716
01-01-2023	$                                                                                                           93,314	$                      48,369	$                                           44,946	$              3,94,770
01-01-2024	$                                                                                                           93,314	$                      43,425	$                                           49,890	$              3,44,880
01-01-2025	$                                                                                                           93,314	$                      37,937	$                                           55,377	$              2,89,503
01-01-2026	$                                                                                                           93,314	$                      31,845	$                                           61,469	$              2,28,034
01-01-2027	$                                                                                                           93,314	$                      25,084	$                                           68,231	$              1,59,803
01-01-2028	$                                                                                                           93,314	$                      17,578	$                                           75,736	$                 84,067
01-01-2029	$                                                                                                           93,314	$                        9,247	$                                           84,067
01-01-2030	$                                                                                                           93,314	$                               -
Total	$                                                                                                     10,26,457	$                  3,23,143	$                                        6,10,000	$           29,37,667
	Interest 11%
1.1.2021	($516686*11%)
01-01-2022	($480207*11%)