Question

ACCOUNTING FOR LEASES Mickey’s Garage entered into a non-cancellable, five-year lease agreement on 1 April 2020...

ACCOUNTING FOR LEASES

Mickey’s Garage entered into a non-cancellable, five-year lease agreement on 1 April 2020 for an item of machinery. The machinery is expected to have an economic life of seven years, after which it will have no salvage or residual value and ownership is transferred at the end of the lease. Mickey’s Garage is to make five annual payments of $100,000 (to be made at the end of the year). The rate of interest implicit in the lease is 2%. value of the leased asset is $471,346. Mickey’s Garage also spend $10,000 on installation costs for this piece of machinery. Assume a 31 March year-end.

1. Fill-in the below table.

Year

Lease Liability Open

Cash Payment

Interest Expense

Principal Component

Lease Liability Close

1

2

3

4

5

Type in any workings or justifications to your lease table here

Following from above, record any and all journal entries relating to the lease that took place anytime in the first year (i.e. for the year ending 31 March 2021). This includes the initiation of the lease, any payments made, interest, and depreciation. Round to the nearest whole dollar.

Homework Answers

Answer #1
Year Lease liability opening Cash Payment Interest Expense Principal Component Lease Liability Close
1 471346 100000 9427 90573 380773
2 380773 100000 7615 92385 288388
3 288388 100000 5768 94232 194156
4 194156 100000 3883 96117 98039
5 98039 100000 1960 98039 0

the value of the leased asset is $471,346 is considered as present value of lease payments discounted at 2%.

Journal entries:

Year 1:

1/4/2020 Gross Asset (Machinery) 471346
Lease Liability 471346
31/3/2021 Lease Rental Expense (Reduction of Lease Liability) 100000
Cash (Paid to Lessor) 100000
31/3/2021 Depreciation (Reduction of Gross Asset) 67335
Depreciation Expense Account 67335

Depreciation:

value of asset =471346

life = 7 yrs

residual value=0

Depreciation =471346/7=67335

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