Question

Tamarisk Company leased equipment from Costner Company, beginning on December 31, 2016. The lease term is 7 years and requires equal rental payments of $37,179 at the beginning of each year of the lease, starting on the commencement date (December 31, 2016). The equipment has a fair value at the commencement date of the lease of $220,000, an estimated useful life of 7 years, and no estimated residual value. The appropriate interest rate is 6%.

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Prepare Tamarisk’s 2016 and 2017 journal entries, assuming Tamarisk depreciates similar equipment it owns on a straight-line basis.

Answer 1

Solution :

Journal Entries - Tamarisk Company
Date	Particulars	Debit	Credit
31-Dec-16	Leased Asset Dr	$220,000.00
	To Lease liability		$220,000.00
	(To record asset acquired on lease)
31-Dec-16	Lease liability Dr	$37,179.00
	To Cash		$37,179.00
	(To record lease payment)
31-Dec-17	Interest Expense Dr [($220,000 - $37,179)*6%]	$10,969.00
	Lease liability Dr	$26,210.00
	To Cash		$37,179.00
	(To record second lease payment)
31-Dec-17	Depreciation expense Dr ($220,000/7)	$31,429.00
	To Accumulated depreciation - Leased Equipment		$31,429.00
	(To record depreciation expense)