Question

Rogers Company signs a five-year capital lease with Packer Company for office equipment. The annual year-end lease payment is $10,000, and the interest rate is 8%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five-year life for the office equipment.
  

Answer 1

Account Titles and Explanation	Debit	Credit
Depreciation Expense	$   7,985
Accumulated Depreciation - Office Equipment		$       7,985
(Being Depreciation on office equipment recorded)
Workings:
Present Value of Lease payment	=	$10000 X PVAF (n=5, r=8%)
	=	$10000 X 3.9927
	=	$     39,927
Depreciation Expense (Straight line method)	=	Present Value of Lease payment / Lease term period
	=	$39927 / 5 years
	=	$       7,985