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On January 1, 2017, Windsor Corporation signed a 5-year noncancelable lease for a machine. The terms...

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.

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Answer #1
Present value of the minimum lease payments = 8634*4.16986 = $36003
January 1, 2017 Leased Equipment 36003
      Lease Liability 36003
January 1, 2017 Lease Liability 8634
       Cash 8634
December 31, 2017 Depreciation Expense 7201 =36003/5
       Accumulated Depreciation - Capital Leases 7201
December 31, 2017 Interest Expense 2737 =(36003-8634)*10%
        Interest Payable 2737
January 1, 2018 Lease Liability 5897
Interest Payable 2737
       Cash 8634
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