Question

Teal Mountain Company leased equipment from Costner Company, beginning on December 31, 2016. The lease term...

Teal Mountain Company leased equipment from Costner Company, beginning on December 31, 2016. The lease term is 8 years and requires equal rental payments of $51,653 at the beginning of each year of the lease, starting on the commencement date (December 31, 2016). The equipment has a fair value at the commencement date of the lease of $340,000, an estimated useful life of 8 years, and no estimated residual value. The appropriate interest rate is 6%. Click here to view the factor table. Prepare Teal Mountain’s 2016 and 2017 journal entries, assuming Teal Mountain depreciates similar equipment it owns on a straight-line basis. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Homework Answers

Answer #1

Solution:

Calculation of PV of lease payment = Annual payment * PVAD(6%,8)

= $51,653 * 6.5824

= $340,000

The lease is capital lease as :

PV of lease payment exceeds 90% of fair value lease life exceeds 75% of useful life.

Journal entries

Date Account Titles and explaination Debit($) Credit($)
Dec 31, 2016 Leased asset A/c Dr $340,000
To Leased liability A/c $340,000
Dec 31, 2016 Lease liability A/c Dr $51,653
To Cash A/c $51,653
Dec 31, 2017 Interest expense A/c Dr $20,400
To interest payable A/c ($340,000*6%) $20,400
Dec 31, 2017 Depreciation expense A/c Dr $42,500
To Depreciation accumulated A/c($340,000 / 8) $42,500
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