Question

# On December 31, 2016, Sage Hill Corporation signed a 5-year, non-cancelable lease for a machine. The...

On December 31, 2016, Sage Hill Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Sage Hill to make annual payments of \$8,026 at the beginning of each year, starting December 31, 2016. 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. Sage Hill uses the straight-line method of depreciation for all of its plant assets. Sage Hill’s incremental borrowing rate is 9%, and the lessor’s implicit rate is unknown.

Prepare all necessary journal entries for Sage Hill for this lease through December 31, 2017.

Computation of present value of minimum lease payments:\$8,026 X 4.23972* = \$34028

* PV annuity due factor = 1 + [{1-(1+0.09)-4}÷0.09] = 4.23972

Journal entry:

 Date journal debit credit 31 dec. Lease equipment a/c 34028 To lease liability 34028 Lease liability 8026 To cash 8026 31 december 2017 depreciation expense 6805.6 To accumulated dep.- capital lease 6805.6 (34028÷5) Interest expense 2340 To interest payble 2340 (34028-8026) × 9% Lease liability 5686 Interest payble 2340 To cash 8026