Question

Leases

Six ovens were rented on December 31, with $20,000 charged to rent expense. The lease runs for 6 years with an implicit interest rate of 5%. At the end of the 6 years, Peyton will own them. Make any necessary adjusting entries.

Hints:

• When calculating the lease obligation pay close attention to the fact that the lease was signed and the first payment was made on the first day of the lease which is the last day of the year. Will you be calculating present value of an ordinary annuity or an annuity due?
• If a leased asset is acquired on the last day of the current year would depreciation be recorded on this asset for the current year?
• If a leased asset is acquired on the last day of the current year would interest expense be recorded on this asset for the current year?

Answer 1

Answer 1:	First payment was made on the date of the lease. Therefore, present value of an annuity due would be used to calculate the lease obligation.
Answer 2:	Leased asset is not used in the current period if a leased asset is acquired on the last day of the current year. Therefore, Depreciation expense would be ZERO.	$0
Answer 3:	Lease was signed on the last day of the current year. Therefore, Lease obligation will be arise at last day of the current year. Therefore, Interest would not applicable.	$0