Question

On January 1, 2020 a sign lease on a piece of equipment. Annual payments of $16,554.85...

  1. On January 1, 2020 a sign lease on a piece of equipment. Annual payments of $16,554.85 will be made at the beginning of each year starting on 1/1/20. The fair value of the leased asset is $60,000. The term of the lease is 4 years. Its economic life is 4 years with no residual value. The lessor set payments to earn 7% rate of return. Our incremental borrowing rate is 7%. This is a financing lease.

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

Please show the work

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Answer #1

Answer :

Step 1 :- Amount of lease liability :

= $16,554.85 × 1 + $16,554.85 × PVAF (7%, 3)

= $16,554.85 + $16,554.85 × 2.62432

​​​​​= $16,554.85 + $43,445.15

= $60,000

Step 2 :- Amortization table :

Particulars 1 2 3 4
Opening balance $60,000 $43,445.15 $29,931.47 $15,471.82
(+) interest expense@7% not applicable $3,041.16 $2,095.20 $1083.03
(-) lease payment (cash flow) ($16,554.85) ($16,554.85) ($16,554.85) $16,554.85
Closing balance $43,445.15 $29,931.47 $15,471.82 $0

Journal entry :

Date General journal Debit Credit
01-jan-2020 Right of use asset $60,000
Lease liability $60,000
01-jan-2020 Lease liability $16,554.85
Cash $16,554.85
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