Question

1. On January 1, 2020 we a sign lease agreement. It calls for annual rental payments of $1,137 at the beginning of each year of the 3-year lease beginning on 1/1/20. The equipment has an economic useful life of 7 years; a fair value of $7,000; a book value of $5,000. The lessor expects a residual value of $4,500 at the end of the lease term. We have an incremental borrowing rate of 8%. There is no bargain purchase option. Ownership of the lease does not transfer at the end of the lease term. This is an operating lease.

Required: Prepare the amortization table and the journal entries for this lease.

Please show the work

Answer 1

Answer :

Step 1 :- Amount of lease liability :

= $1,137 × 1 + $1,137 × PVAF (8%, 2)

= $1,137 + $1,137 × 1.78326

​​​​​= $1,137 + $2,027.56

= $3,165

Step 2 :- Amortization table :

Particulars	1	2	3
Opening balance	$3,165	$2,208	$1053
(+) interest expense@8%	not applicable	$162	$84
(-) lease payment (cash flow)	($1,137)	($1,137)	($1,137)
Closing balance	$2,208	$1053	$0

Journal entry :

Date	General journal	Debit	Credit
01-jan-2020	Right of use asset	$3,165
	Lease liability		$3,165
01-jan-2020	Lease liability	$1,137
	Cash		$1,137