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