On January 1, 2017, Roma Company leased a tractor. The lease agreement qualifies

Question

On January 1, 2017, Roma Company leased a tractor. The lease agreement qualifies as a capital lease and calls for payments of $10,000 per year (payable each year on January 1, starting in 2018) for eight years. The annual interest rate on the lease is 10%. Roma Company uses a calendar-year reporting period. Prepare the journal entry for January 1, 2017, to record the leasing of the tractor: Prepare the journal entry for December 31, 2017, to recognize the interest expense for the year 2017. Prepare the journal entry to record the first lease payment.

Explanation / Answer

Solution:

Present value of minimum lease payments = $10,000 * Cumulative PV factor at 10% for 8 years

= $10,000 * 5.33492 = $53,349

Journal Entries Date Particulars Debit Credit 1-Jan-17 Leased Truck Dr $53,349.00        To Lease liability $53,349.00 (To record truck purchased on lease) 31-Dec-17 Interest expense Dr $5,335.00        To Interest payable $5,335.00 (To record interest expense) 1-Jan-18 Lease liability Dr $4,665.00 Interest payable Dr $5,335.00        To Cash $10,000.00 (To record first lease payment) 31-Dec-18 Interest expense Dr ($53,349 - $4,665)*10% $4,868.00        To Interest payable $4,868.00 (To record interest expense) 1-Jan-19 Lease liability Dr $5,132.00 Interest payable Dr $4,868.00        To Cash $10,000.00 (To record second lease payment)

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