Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Blue Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2020, is $78,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed. 4. The agreement requires equal annual rental payments of $24,869.98 to the lessor, beginning on January 1, 2020. 5. The lessee's incremental borrowing rate is 5%. The lessor's implicit rate is 4% and is unknown to the lessee. 6. Blue uses the straight-line depreciation method for all equipment. Click here to view factor tables. Prepare all of the journal entries for the lessee for 2020 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee's annual accounting period ends on December 31. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 2 decimal places, e.g. 5,265.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit (To record the lease) (To record lease liability)

Answer 1

Date	General journal	Debit	Credit
1/1/20	Leased Equipment	71777.00
	Lease Liability (24869.98*2.88609)		71777.00
	(to record the lease)
	Lease Liability	20366
	Cash		20366
	(to record lease liability)
12/31/20	Interest Expense ((71777-24869.69)*4%	1876.29
	Lease liability (balancing figure)	22993.69
	Cash		24869.98
	(to record interest expense)
12/31/20	Depreciation Expense	14355.40
	Accumulated Depreciation (71777.00/5)		14355.40
	(to record depreciation)

PV of an annuity due of 1 for n = 3, i = 4% = 2.88609