On January 1, 2017, Windsor Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Windsor to make annual payments of $8,634 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $4,900 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Windsor uses the straight-line method of depreciation for all of its plant assets. Windsor’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.
Prepare all necessary journal entries for Windsor for this lease through January 1, 2018.
|Present value of the minimum lease payments = 8634*4.16986 = $36003|
|January 1, 2017||Leased Equipment||36003|
|January 1, 2017||Lease Liability||8634|
|December 31, 2017||Depreciation Expense||7201||=36003/5|
|Accumulated Depreciation - Capital Leases||7201|
|December 31, 2017||Interest Expense||2737||=(36003-8634)*10%|
|January 1, 2018||Lease Liability||5897|
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