Preston Company signs a five-year capital lease with Starbuck Company for office equipment. The annual lease payment is $10,000, and the interest rate is 10%.
Required
1. Compute the present value of Preston’s lease payments.
2. Prepare the journal entry to record Preston’s capital lease at its inception.
3. Complete a lease payment schedule for the five years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is $37,908. (Hint: To find the amount allocated to interest in year 1, multiply the interest rate by the beginning-of-year lease liability. The amount of the annual lease payment not allocated to interest is allocated to principal. Reduce the lease liability by the amount allocated to principal to update the lease liability at each year-end.)
Period Ending Date | Beginning Balance of Lease Liability | Interest on Lease Liability | Reduction of Lease Liability | Cash Lease Payment | 1 Ending Balance of Lease Liability |
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4. Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five-year life for the office equipment.
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