Question

Pronghorn Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2017. Annual rental payments of $46,000 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 7%; Pronghorn’s incremental borrowing rate is 9%. Pronghorn is unaware of the rate being used by the lessor. At the end of the lease, Pronghorn 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. Pronghorn uses the straight-line method of depreciation on similar owned equipment.
1. Prepare the journal entries, that Pronghorn should record on December 31, 2017. (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.)
2. Prepare the journal entries, that Pronghorn should record on December 31, 2018. (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.)
3. Prepare the journal entries, that Pronghorn should record on December 31, 2019. (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 answers to 0 decimal places e.g. 58,971.)
4. What amounts would appear on Pronghorn’s December 31, 2019, balance sheet relative to the lease arrangement? (Round answers to 0 decimal places, e.g. 58,971.)

Answer 1

	Journal entries in the books of the Lessee :
Date	Particulars	Debit	Credit
		($)	($)
31st Dec 2017	Lease liability	42200
	Interest expense	3800
	Cash		46000
	Lease Asset	46000
	Lease Liability		46000
31st Dec 2018	Lease liability	42200
	Interest expense	3800
	Cash		46000
	Lease Asset	92000
	Lease Liability		92000
31st Dec 2019	Lease liability	42200
	Interest expense	3800
	Cash		46000
	Lease Asset	138000
	Lease Liability		138000