Question

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.

Answer #1

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 | ||

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