Question

Assume that on December 31, 2016, Waste Management, Inc. signs an 8-year noncancelable lease agreement to lease a building from Reyes Warehouse Company. The following information pertains to this lease agreement.

1.		The agreement requires equal rental payments of $73,530 beginning on December 31, 2016.
2.		The fair value of the building on December 31, 2016, is $465,000.
3.		The building has an estimated economic life of 10 years, a guaranteed residual value at the end of 8 years of $16,000, and an expected residual value of $9,000. Waste Management depreciates similar buildings using the straight-line method.
4.		The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5.		Waste Management’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not known by Waste Management.

Prepare the journal entries on Waste Management’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2016, 2017, and 2018. Waste Management’s corporate year-end is December 31.

Answer 1

1 Lease Date 2 Annual Rental Payments 73,530.00 Beginning of the Period 3 Fair Value of Building 4 Guaranteed Residual Value 16,000.00 5 Expected Residual Value 9,000.00 6 Implict Rate 7 Lease Term 8 Estimated Life of Asset 9 Depreciation 10 PV of L 12/31/2016 $465,000.00 8% 8 Years 10 Years $56,124.84 $464,998.69 ease Payments Annual Pavments | Interest @ 8% Reduction in Lease Liability | Lease Liability. 12 13 14 15 16 17 18 19 20 21 Year Date 12/31/2016 $ 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2023 -464,998.69 391,468.69 349,256.19 S 303,666.68 254,430.02 201,254.42 143,824.77 S 81,800.75 $ 14,814.81 0.00 $73,530.00 $73,530.00 $73,530.00 $73,530.00 $73,530.00 $73,530.00 $73,530.00 $73,530.00 $16,000.00 $588,240.00 $0.00 S31,317.50 $27,940.50 $24,293.33 $20,354.40 $16,100.35 $11,505.98 $6,544.06 $1,185.19 $139,241.31 $73,530.00 $42,212.50 $45,589.50 $49,236.67 $53,175.60 $57,429.65 $62,024.02 $66,985.94 $14,814.81 $464,998.69 4 End of 8th Year Totals 23 24

Journal Entries in the Books of Waste Management 2 Date Journal Entries Debit (S) Credit (S) $464,998.69 3 12/31/2016 Right-of-use Asset Lease Liability $464,998.69 (To record the Lease Liability) 6 12/31/2016 Lease Liability $73,530.00 Cash $73,530.00 To record the Lease Payment) Interest Expense (To record the Lease Payment) 9 12/31/2017Lease Liability 10 $42,212.50 $31,317.50 $73,530.00 Cash 12 13 12/31/2017 Depreciation Expense $56,124.84 Right-of-use Asset $56,124.84 To record the Depreciation Expense) Interest Expense (To record the Lease Payment) 15 16 12/31/2017 Lease Liability 17 18 19 20 12/31/2017 Depreciation Expense 21 $42,212.50 $31,317.50 $73,530.00 Cash $56,124.84 Right-of-use Asset $56,124.84 (To record the Depreciation Expense) 23

1 Lease Date 2 Annual Rental Payments 73530 42735 Beginning of the Period Fair Value of Building465000 4 Guaranteed Residual Value 16000 5 Expected Residual Value 9000 6 Implict Rate 7 Lease Term 8 Estimated Life of Asset 10 9 Depreciation 10 PV of Lease PaymentsPV(SBS6,$B$7-$BS2-SB$4,1) 0.08 icars Years SLNB10,B4,B7) Lease Liability Date Annual Pavments Interest @ 8% Reduction in Lease Liability 12 13 0 14 1 15 2 16 3 17 4 18 5 19 6 20 7 ear 42735 42735 43100 43465 43830 44196 44561 44926 45291 45291 Totals B10 -D14+E14 D15-E15 D16+E16 D17+E17 D18+E18 D19+E19 D20-E20 D21+E21 IPMT SBS6,SA15,S$BS7,-SBS10,SBS4,1) PPMT SBS6,SA15,SB$7, SBS10,SB$4,1) F14-E15 IPMT(SB$6,SA16,$B$7,-SBS10,SB$4,1) PPMT(SBS6 SA16,SB$7,-$BS10,SB$4,1) F15-E16 IPMT (SB$6,SA18,SB$7-SBS10,SB$4,1) PPMT(SBS6,SA18,SB$7,-$BS10,SB$4,1) F17-E18 IPMT SB$6 SA19 SBS7,-SBS10.SB$4.1) PPMT(SBS6 SA19.SB$7,-SBS10.SB$4,1) F18-E19 IPMT (SB$6,SA20,SB$7,-SBS10,$BS4,1) PPMT(SBS6,SA20,SB$7-SBS10,SB$4,1) F19-E20 End of Sth Year 16000 -SUM(C14:C21) -F21 *8% -F21-E22 -C22-D22 -SUME14:E22) SUMD14:D22) 23 24