Question

Journal Entries for a Capital Lease-Lessee

On January 1, the lessee company signed an operating lease contract. The lease contract calls for $3,000 payments at the end of each year for 10 years. The rate implicit in the lease is 10%.

Assume that the lease is to be accounted for as a capital lease. Also assume that the leased asset is to be amortized over the 12-year asset life rather than the 10-year lease term.

1. Make the journal entries necessary on the books of the lessee company at the end of the first year, including the recording of the first lease payment. Round your answers to the nearest whole dollar. For compound transactions, if an amount box does not require an entry, leave it blank.

lease liability	1157
intrest exp	1843
cash		3000

amortization exp	?
accumulated amortization on leased asset		?

* Note: I got 1286 and it was wrong.

Answer 1

The economic useful life of leased asset cannot exceed the lease term hence it should be amortized over 10 years and not 12 year.

Amortisation = 18,434 / 10 years = $1,543

amortization exp..Dr  $1,543

accumulated amortization on leased asset Cr ..$1,543

Year Year for discounting Annual Lease Installments paid at the end of the 3,000 0.75131 3,000 0.68301 2,049 3,000 0.62092 0 3,000 51 0.42410 3,000 0.38554 ear PV factor @ 10% Present Value of Min lease payments Value at which to be recorded as asset by leasee is lower of FMV or NPV Rounded off AmortisationPresent value/10 years 2 0.56447 1,693 0.90909 0.82645 0.51316 0.46651 2,727 2,479 1,400 1,15718,434 18,434 1,543 1,543 1,543 1,543 1,543 1,543 1,543 15,434 e economic useful life of leased asset cannot exceed the lease term hence it should be amortized over 10 years and not 12 year Present value of minimum lease payments Repayment Schedule Reduction Annual Finance Principal Outstanding Year Payment Charges Amount Liability 18,434 17,277 16,005 14,605 13,066 11,372 9,510 7,461 5,207 2,727 Jan 1, 2017 Dec 31, 2017 3,000 1,157 1,272 Dec 31, 20183,000 Dec 31, 2019 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025 1,728 1,600 3,000 3,000 3,000 3,000 3,000 3,000 3,000 1,307 1,137 1,693 1,863 2,049 2,479 2,727 Dec 31,20263,000 30.000 11,566 Lessee Books General Journal 1. Make the journal entry necessary on the books of the lese company on the lease-signing date Jan 1, 2017 Right-of-Use Asset Lease Liability Make the journal entries necessary on the books of the lessee company at the end of the fist year Dec 31, 2017 Interest Expense Lease Liability Debit Credit 18,434 18,434 1,843 1,157 3,000 Dec 31, 2017 Amortization Expense Right-of-Use Asset 1,543 1,543