Question

Problem 14-11AC On January 1, Rogers (lessee) signs a three-year lease for machinery that is accounted for as a finance lease. The lease requires three S18,000 lease payments (the first at the beginning of the lease and the remaining two at December 31 of Year 1 and Year 2). The present value of the three annual lease payments is $51,000, using a 6.003 % interest rate. The lease payment schedule follows. Accounting for finance lease C3 Payments (A) (в) Debi (C) (D) (E) Debi Credit Ending Balance Interest on Cash Lease of Lease Liability Payment Beginning Balance Lease Liability Lease Liability of Lease Liability 6.003% x (A) Date (D)-(B) (А) - (С) S18,000 Jan. 1, Year $51.000 S18,000 $33,000 33,000 16,98 Dec. 31, Year 1.... S1,981 16,019 18,000 16,98 Dec. 31, Year 2 1,019 $3,000 16,981 18,000 $54,000 $51,000 Required 1. Prepare the January 1 journal entry at the start of the lease to record any asset or liability. 2. Prepare the January 1 journal entry to record the first $18,000 cash lease payment. 3. Prepare the December 31 journal entry to record straight-line amortization with zero salvage value at the end of (a) Year 1, (b) Year 2, and (e) Year 3 4. Prepare the December 31 journal entry to record the $18,000 cash lease payment at the end of (a) Year and (b) Year 2

Answer 1

Credit If Lease is classified as FINANCIAL LEASE S.No. Date Particulars Jan 01 Leased Asset Account To Lease Liability (Being asset taken on lease) Debit 51000 51000 2 18000 Jan 01 Lease Liability To Bank (Being lease payment paid at initial date) 18000 3 (a) 17000 Dec 31 Depreciation Account To Leased Asset (Being Depreciation Charged - $51000 divided by 3) 17000 17000 Dec 31 Profit & Loss Account Dr To Depreciation Account (Being Depreciation transferred to P&L/SPL Account) 17000 3(b) Dr 17000 Dec 31 Depreciation Account To Leased Asset (Being Depreciation Charged - $51000 divided by 3) 17000 17000 Dec 31 Profit & Loss Account Dr To Depreciation Account (Being Depreciation transferred to P&L/SPL Account) 17000 3(0) Dr 17000 Dec 31 Depreciation Account To Leased Asset (Being Depreciation Charged - $51000 divided by 3) 17000 17000 Dec 31 Profit & Loss Account Dr To Depreciation Account (Being Depreciation transferred to P&L/SPL Account) 17000 4(a) 1981 Dec 31 Finance Charges Account To Lease Liability (Being Interest Charged) 1981 18000 Dec 31 Lease Liability To Bank (Being instalment paid at the end of Year 1) 18000 1981 Dec 31 Profit & Loss Account To Finance Charges Account (Being Depreciation transferred to SPLAccount) 1981 4(b) 1019 Dec 31 Finance Charges Account To Lease Liability (Being Interest Charged) 1019 Dec 31 18000 Lease Liability To Bank (Being instalment paid at the end of Year 2) 18000 1019 Dec 31 Profit & Loss Account To Finance Charges Account (Being Depreciation transferred to SPL Account) 1019 If Lease is classified as OPERATING LEASE S.No. Date Particulars 1 Jan 01 NO ENTRY Debit Credit 2 Dr 18000 Jan 01 Lease Rental or Lease Expense To Bank (Being lease rental expenses recorded) 18000 3 (a) 3(b) 3 (C) Dec 31 Dec 31 Dec 31 NO ENTRY NO ENTRY NO ENTRY 4(a) Dr 18000 Dec 31 Lease Rental or Lease Expense To Bank (Being lease rental expenses recorded) 18000 4(b) Dr 18000 Dec 31 Lease Rental or Lease Expense To Bank (Being lease rental expenses recorded) 18000