Question

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Larkspur Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years.
2.		The fair value of the asset at January 1, 2020, is $66,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $5,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments of $21,328 to the lessor, beginning on January 1, 2020.
5.		The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee.
6.		Larkspur uses the straight-line depreciation method for all equipment.

Click here to view factor tables.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Part 1

Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round answers to 0 decimal places, e.g. 5,265.)

LARKSPUR COMPANY (Lessee) Lease Amortization Schedule
Date		Annual Lease Payment		Interest on Liability		Reduction of Lease Liability		Lease Liability
1/1/20		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
1/1/20		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/21		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
1/1/22		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount
		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

eTextbook and Media

List of Accounts

Part 2

Prepare all of the journal entries for the lessee for 2020 and 2021 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,265. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record the lease	enter a debit amount	enter a credit amount
	enter an account title To record the lease	enter a debit amount	enter a credit amount
	(To record the lease)
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	(To record lease payment)
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	(To record interest expense)
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To reverse interest expense	enter a debit amount	enter a credit amount
	enter an account title To reverse interest expense	enter a debit amount	enter a credit amount
	(To reverse interest expense)
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	enter an account title To record lease payment	enter a debit amount	enter a credit amount
	(To record lease payment)
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	enter an account title To record interest expense	enter a debit amount	enter a credit amount
	(To record interest expense)
choose a transaction date1/1/2012/31/201/1/2112/31/21During 2020During 2021 1/1/2012/31/201/1/2112/31/21During 2020During 2021	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)

Answer 1

Initial Liability :
PV of lease payments, $21,328  X  2.88609(PV of an annuity due @ 4%,3)	$                                                                       61,555
Shamrock Company (Lessee)
Lease Amortization Schedule
	(a)	(b) Preceding balance of (d) X 4%	(c) (a) minus (b)	(d) Preceding balance minus ©
Beginning of Year	Annual Lease Payment	Interest (4%) on Unpaid Liability	Reduction of Lease Liability	Lease Liability
1/1/20				$                   61,555
1/1/20	$                                                                       21,328		$                          21,328	$                   40,227
1/1/21	$                                                                       21,328	$                             1,609	$                          19,719	$                   20,508
1/1/22	$                                                                       21,328	$                                820	$                          20,508	$                            0
Total	$                                                                       63,984	$                             2,430	$                          61,554
Journal Entries
Date	Account Titles and Explanation	Debit	Credit
1/1/20	Leased Equipment Under Capital Leases	$                           61,555
	Lease Liability		$                          61,555
	(To reacord Lease)
1/1/20	Lease Liability	$                           21,328
	Cash		$                          21,328
	(To reacord Lease Payment)
12/31/20	Interest Expense	$                             1,609
	Interest Payable		$                            1,609
	(To record Interest)
12/31/20	Depreciation Expense (61,554/5 years)	$                           12,311
	Accumulated Depreciation —Capital Leases		$                          12,311
	(To record amortization of right to use assets)
1/1/21	Interest payable	$                             1,609
	Interest Expense		$                            1,609
	(To reverse interest Expense)
1/1/21	Interest Expense	$                             1,609
	Lease Liability	$                           19,719
	Cash		$                          21,328
12/31/21	Interest Expense	$                                820
	Interest Payable		$                               820
	(To record Interest)
12/31/21	Depreciation Expense (61,554/5 years)	$                           12,311
	Accumulated Depreciation —Capital Leases		$                          12,311
	(To record amortization of right to use assets)