Question

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.)

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