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On December 31, 2019, Teal Mountain Corporation signed a 5-year, non-cancelable lease for a machine. The...

On December 31, 2019, Teal Mountain Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Teal Mountain to make annual payments of $8,200 at the beginning of each year, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $5,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Teal Mountain uses the straight-line method of depreciation for all of its plant assets. Teal Mountain’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

Compute the present value of the lease payments. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places e.g. 5,275.)

Present value of the lease payments

$enter the Present value of the lease payments in dollars

Prepare all necessary journal entries for Teal Mountain for this lease through December 31, 2020. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

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Answer #1

Answer:

Present value of lease payments = Annual payment x PVIFA(11%,5)= $ 8200x 3.6959 = $30306

On the books of Teal Mountain Corporation:

Date Account Titles Debit Credit
$ $
January 1, 2019 Leased Asset 30306
Lease Liability 30306
January 1, 2019 Lease Liability 8200
Cash 8200
December 31, 2019 Depreciation Expense ( $ 30306 / 5) 6061
Accumulated Depreciation - leased Asset 6061
December 31, 2019 Interest Expense $ ( 30306- 8200) x 11% 2432
Interest Payable 2432
January 1, 2020 Lease Liability 5768
Interest Payable 2432
Cash 8200
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