Question

On December 31, 2016, Sage Hill Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Sage Hill to make annual payments of $9,110 at the beginning of each year, starting December 31, 2016. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Sage Hill uses the straight-line method of depreciation for all of its plant assets. Sage Hill’s incremental borrowing rate is 9%, and the lessor’s implicit rate is unknown. Click here to view the factor table. What type of lease is this? This is a/an lease. LINK TO TEXT LINK TO TEXT Compute the present value of the lease payments. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275.) Present value of the lease payments $ LINK TO TEXT LINK TO TEXT Prepare all necessary journal entries for Sage Hill for this lease through December 31, 2017. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.) Date Account Titles and Explanation Debit Credit (To record the lease) (To record first lease payment) (To record amortization of the right-of-use asset) 12/31/17 (To record interest expense)

Answer 1

1. This is a capital lease to Sage Hill since the lease term (5years) is greater than 75% of the economic life (6 years) of the leased asset.

2.Computation of Present value of lease payment = Lease payment at beginning of each year * (1+ PVF (9% ,4yrs)

= $ 9110 * (1+3.23972)

= $ 38624

3. Journal entries

31 dec 2016	Lease Equipment	38624
	Lease Liability		38624
31 dec 2016	Lease liability	9110
	cash		9110
31 dec 2017	Depreciation expense	7725
	Accumulated dep. -Capital lease		7725
	(38624 / 5 yrs = 7725)
	Interest expense	2656
	Interest Payable		2656
	(38624 - 9110 ) *9% = 2656
31 dec 2017	Lease liability	6454
	Interest payable	2656
	cash		9110