Grouper Steel Company, as lessee, signed a lease agreement for
equipment for 5 years, beginning December 31, 2020. Annual rental
payments of $56,000 are to be made at the beginning of each lease
year (December 31). The interest rate used by the lessor in setting
the payment schedule is 6%; Grouper’s incremental borrowing rate is
8%. Grouper is unaware of the rate being used by the lessor. At the
end of the lease, Grouper has the option to buy the equipment for
$5,000, considerably below its estimated fair value at that time.
The equipment has an estimated useful life of 7 years, with no
salvage value. Grouper uses the straight-line method of
depreciation on similar owned equipment.
A. Prepare the journal entries, that Grouper should record on December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 58,971.)
Date |
Account Titles and Explanation |
Debit |
Credit |
December 31, 2020 |
|||
(To record leased asset and related liability.) |
|||
(To record the first rental payment.) |
Solution:
Lease liability = Present value of lease payment + Present value of bargain purchase option
= $56,000 * Cumulative PV Factor at 8% for 5 periods of annuity due + $5,000 * PV factor at 8% for 5th period
= $56,000 * 4.31213 + $5,000 * 0.68058
= $244,882
Grouper Steel Company | |||
Journal Entries | |||
Date | Particulars | Debit | Credit |
31-Dec-20 | Equipment Dr | $244,882.00 | |
To Lease Payable | $244,882.00 | ||
(To record lease liability) | |||
31-Dec-20 | Lease payable Dr | $56,000.00 | |
To Cash | $56,000.00 | ||
(To record lease payment) |
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