Question

Barry Limited (lessee) entered into a finance lease agreement with the following terms:

lease term is 4 years

estimated economic life of the leased asset (equipment) is 5 years

Right of use asset amount at the inception was $85,695

Annual lease payments of $30,000 each payable in advance.

residual value at the end of the lease term is $5,000 but no amount was guaranteed by the lessee

Which one of the following is correct for Barry Limited?

Select one:

Depreciation entry;
Dr Depreciation $16,139
Cr Accumulated depreciation $16,139

To record the asset at the inception;
Dr Right of use asset $85,695
Cr Cash $30,000
Cr Lease liability $55,695

Depreciation entry;
Dr Depreciation $20,174
Cr Accumulated depreciation $20,174

To record the asset at the inception;
Dr Right of use asset $85,695
Cr Cash $30,000
Cr Equipment $55,695

Answer 1

Given :

Lease term = 4years

Estimated economic life of the leased asset = 5years

Right of use ,at the time of inception = $85,695

Annual lease payments = $30,000

Unguaranteed residual value at the end of the lease term = $5,000

Requirement

Depreciation Computation =

=$

=$

= $16,139

Depreciation Entry : Dr Depreciation $16,139

Cr Accumulated Depreciation $16,139

(debit all expenses Depreciation expense debited , transferred to Accumulated Depreciation A/C)

To Record the Asset at the time of Inception : Dr Right of use asset $85,695
  Cr Cash $30,000
Cr Lease liability $55,695

(at inception the Lessee Barry Limited should capitalise the finance leased asset and set up a lease liability for the value of the asset recognition.)