Question

145) Warren Corporation signs an agreement on January 2, 2010, to lease delivery equipment for a five-year period. The current market value of the delivery equipment on January 2, 2010, is $225,000. The lease agreement calls for annual payments of $50,040. The first payment is made on January 2, 2010, all other payments are made on December 31 of each year. The lease agreement calls for an 8% interest rate. The estimated remaining life of the delivery equipment is six years. Ownership of the delivery equipment will transfer to Warren Corporation at the end of the lease term. Note: present value tables required.

a) Prepare the journal entry on January 2, 2010, to record the lease agreement and make the first lease payment. b) Prepare the entry on December 31, 2010, to record the second lease payment and the accrual of interest.

Answer 1

	PRESENT VALUE TABLE
Year (I)	Opening Balance (II)	Lease Rental (III)	Interest (8%) {(II)*8%} (IV)	Reduction In Principal (II-IV)	Closing Balance In lease A/c (II-V)
1yr	$        225,000	$        50,040	$ 18,000	$     32,040	$          192,960
2yr	$        192,960	$        50,040	$ 15,437	$     34,603	$          158,357
3yr	$        158,357	$        50,040	$ 12,669	$     37,371	$          120,985
4yr	$        120,985	$        50,040	$    9,679	$     40,361	$             80,624
5yr	$          80,624	$        50,040	$    6,450	$     43,590	$             37,034

Jan2-2020
Lease A/c …..Dr $225,000
To Assets $225,000
(Being assets is delivered to Lessee)

Bank A/c …..Dr $50,040
To Lease Rental $50,040

Lease Rental ......Dr $50,040
To Lessee A/c $50,040

Dec 31-2020
Accrued Interest ........Dr $18000
To Interest $18000

Interest ..........Dr $18000
To Profit Loss A/C $18000

Bank A/C ..........Dr $50,040
To Lease Rental $50,040
(Being 2nd Installment received)

Lease Rental .......Dr $50,040
To Accrued Interest $15,437
To Lessee $ 34,603