Question

# On December 31, 2016, Sage Hill Corporation signed a 5-year, non-cancelable lease for a machine. The...

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)

#### Homework Answers

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
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