Question

On January 1, 2017, Bonita Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Bonita to make annual payments of $8,215 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $5,200 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Bonita uses the straight-line method of depreciation for all of its plant assets. Bonita’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.

A.) Compute the PV of the minimum lease payments

b.) Prepare all necessary journal entries for Bonita for this lease through January 1, 2018.

Answer 1

a) Calculation of minimum lease payments
minimum lease payment = annual payment*pv factor annuity
Minimum lease payment = 8215*4.16986 = 34255
b) Journal entries
Date	Particulars			Debit	Credit
01-01-2017	Lease equipment			$ 34,255.00
	lease laibility				$ 34,255.00
01-01-2017	lease laibility			$   8,215.00
	cash				$   8,215.00
31-12-2017	Depreciation exp (34255/5)			$   6,851.00
	accumulated depreciation- capital lease				$   6,851.00
31-12-2017	Interest expenses (34255-8215)*10%			$   2,604.00
	interest payable				$   2,604.00
01-01-2018	Lease laibility			$   5,611.00
	interest payable			$   2,604.00
	cash				$   8,215.00