Question

On January 1, 2018, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $17,500 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $105,000 and were expected to have a useful life of Six years with no residual value. Both firms record amortization and depreciation semi-annually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1.) Record the beginning of the lease for Nath-Langstrom Services.

2.) Record the lease payment and interest expense for Nath-Langstrom Services.

3.) Record the amortization expense for Nath-Langstrom Services.

4.) Record the lease payment and interest expense for Nath-Langstrom Services.

5.) Record the amortization expense for Nath-Langstrom Services.

6.) Record the lease revenue received by ComputerWorld Leasing.

7.) Record the Depreciation expense for ComputerWorld Leasing.

8.) Record the lease revenue received by ComputerWorld Leasing.

9.) Record the Depreciation expense for ComputerWorld Leasing.

Answer 1

Present value of periodic lease payments:
($17,500 × 3.80773*) = $66,635
*Present value of an annuity of $1: n = 4, i = 2%.
In the books of Nath-Langstrom(Lessee)
Date	Account titles and explanation	Debit	Credit
Jan 1, 2018	Right-of-use asset (calculated above)	$66,635
	Lease payable (calculated above)		$66,635
Jun 30, 2018	Interest expense [2% × ($66,635 ? 0)]	$    1,332.70
	Lease payable (difference)	$ 16,167.30
	Cash (lease payment)		$    17,500.00
Jun 30, 2018	Amortization expense ($17,500 ? 1,332.70)	$ 16,167.30
	Right-of-use asset		$    16,167.30
Dec 31, 2018	Interest expense [2% × ($66,635 ? 16,167.30)]	$    1,009.35
	Lease payable (difference)	$ 16,490.65
	Cash (lease payment)		$    17,500.00
Dec 31, 2018	Amortization expense ($17,500 ? 1,009.35)	$ 16,490.65
	Right-of-use asset		$    16,490.65
In the books of ComputerWorld(Lessor)
Jun 30, 2018	Cash(First Lease payment)	$ 17,500.00
	Lease Revenue		$    17,500.00
Jun 30, 2018	Depreciation expense ($105,000 ÷ 6 Years x 2)	$    8,750.00
	Accumulated depreciation		$      8,750.00
Dec 31, 2018	Cash(Second Lease payment)	$ 17,500.00
	Lease Revenue		$    17,500.00
	Depreciation expense ($105,000 ÷ 6 Years x 2)	$    8,750.00
	Accumulated depreciation		$      8,750.00

Amortization schedule

Date	payments	Effective Interest	Decresae In Balance	Outstanding Balance
		(2% × Outstanding balance)
1/1/18				$ 66,635.00
6/30/18	17,500.00	1,332.70	16,167.30	50,467.70
12/31/18	17,500.00	1,009.35	16,490.65	33,977.05
6/30/19	17,500.00	679.54	16,820.46	17,156.60
12/31/19	17,500.00	343.13	17,156.87	(0)