Question

Exercise 21-1 On January 1, 2017, Kingbird Corporation signed a 5-year noncancelable lease for a machine....

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.

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.

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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