Question

Soong Corporation has leased a piece of equipment that has a useful life of 12 years....

Soong Corporation has leased a piece of equipment that has a useful life of 12 years. This capital lease requires payments of $43,000 per year for 12 years. Soong currently is able to borrow money at a long-term interest rate of 8 percent. (Round to the nearest dollar.) 1. Calculate the present value of the lease. 2. Prepare the journal entry to record the lease agreement. 3. Prepare the journal entry to record depreciation of the equipment for the first year using the straight-line method. 4. Prepare the journal entries to record the lease payments for the first two years

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Answer #1

1. Present value of the lease = $43000 x 7.139 (pvf @8% for 12 years) = $306,977

No. Account Titles Debit Credit
2 Asset on Lease $306,977
Lessor $306,977
(To record the asset on lease)
3. No Journal entry required
(Depreciation will be charged by Lessor in his books)
4. Lessor $18,442
Interest Expense ($306,977*8%) $24 558
Cash $43,000
Lessor $19,917
Interest Expense [($306,977- $18 442)*8%] $23,083
    Cash $43,000
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