Question

Blue Design signed a lease for a conveyor belt on January 5, 2014, and the lease started on that date. As per the lease, Blue Design is required to make four annual lease payments of $4500, and the first payment is due on December 31, 2014. Blue Design had the option to finance the conveyor belt by borrowing at an interest rate of 11%. What entries should Blue Design record on January 5 and December 31, 2014 if the lease were to be a finance lease?

Answer 1

Journal Entry- Blue Design - Lease - Finance Lease
Date	Account Title and Explanation	Debit	Credit
5-Jan-14	Right-Of-Use Asset	$13,960
	Lease Liability		$13,960
	TO Record Lease at Inception
31-Dec-14	Interest Expense (13960*11%)	$1,536
	Lease Liability		$1,536
	To Record Lease Interest
31-Dec-14	Amortization Expense (13960/4)	$3,490
	Right-Of-Use Asset		$3,490
	To Record Amortisation

Computation of PV of Lease
Annual lease Payment	4500
Cumm PVAF @ 11% for 1-4	3.1024
PV of Annual Lease Payment	13960.8
or $13960 Rounded OFF

Note: Answer may be slightly differ due to rounded off of Presetn value factor.