Question

Exercise 21-1 On January 1, 2017, Kingbird Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Kingbird to make annual payments of $8,199 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $5,200 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Kingbird uses the straight-line method of depreciation for all of its plant assets. Kingbird’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown. Click here to view factor tables

Compute the present value of the minimum lease payments. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

The present value of the minimum lease payments

Prepare all necessary journal entries for Kingbird for this lease through January 1, 2018.

Answer 1

1) Present value of minimum lease payments = 8,199 * 4.10245

= $33,636

Present value of an annuity for 5 years at 11% = 4.10245

2 Journal Enteries

Date	Journal Entry	Debit	Credit
1 Jan 2017	Leased Equipment	$33,636
	To Lease Liability		$33,636
1 Jan 2017	Lease Liability	$8,199
	To cash		$8,199
31 Dec 2017	Depreciation Expense (33,636 / 5)	$6,727

	To Accumulated depreciation		$6,727
31 Dec 2017	Interest Expense	$2,799
	To interest payable {(33636 - 8,199) * 11%}		$2,799
1 Jan 2018	Lease Liability	$5,400
	Interest Payable	$2,799
	To cash		$8,199

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