Question

On January 1, 2021, Wetick Optometrists leased diagnostic equipment from Southern Corp., which had purchased the equipment at a cost of $2,444,825. The lease agreement specifies six annual payments of $500,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2025. The six-year lease term ending December 31, 2026 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index for the year just ended. Thus, the first payment will be $500,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 125. Southern routinely acquires diagnostic equipment for lease to other firms. The interest rate in these financing arrangements is 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Prepare the appropriate journal entries for Wetick to record the lease at its beginning.

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• Record the beginning of the lease for Wetick Optometrists.
• Record the lease payment for Wetick Optometrists.

2. Assuming the CPI is 131 at that time, prepare the appropriate journal entries related to the lease for Wetick at December 31, 2021.

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• Record the lease payment for Wetick Optometrists.
• Record amortization of the right-of-use asset for Wetick Optometrists.

Answer 1

Note: PVAD Of ($1, n=6, I= 9%) = 4.88965

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