9-71 Capital (Financing) Lease On December 31, 20XO, the Jackson Building Mainte

Question

9-71 Capital (Financing) Lease On December 31, 20XO, the Jackson Building Maintenance Services acquired cleaning equip ment on a capital lease for three annual lease payments of $30,000 each on December 31,20X1 20X2, and 20X3. The implicit interest rate was 10% compounded annually. 1. Compute the present value of the capital lease. 2. Prepare journal entries at the inception of the lease on December 31, 20X0, and for each of the 3 years. Distinguish between the short and long-term classifications of the lease liability.

Explanation / Answer

Annuity Factor (f) = (1-(1+r)^-n)/r= 2.487

1)Present value = $30000*2.487 = $74605.56

Journal Entries :

Gross Asset Dr :$74605.56

Lease Liability Cr : $ 74605.56

Entries Ending First Year, 2nd year & 3 Rd year End

Interest Expense Dr

8289

Lease Rental (Debit to Lease Liability Account) Dr

21711

Depreciation (Reduction of Gross Asset) Dr

24868

Cash Cr

30000

Depreciation Expense Account Cr

24868

Assumption : 3 years Asset life for Depreciationa and interest is distributed equally in all three years.

3) Short term related with payment to be done in next one year . Long term related more then one year

Entries Ending First Year, 2nd year & 3 Rd year End

Interest Expense Dr

8289

Lease Rental (Debit to Lease Liability Account) Dr

21711

Depreciation (Reduction of Gross Asset) Dr

24868

Cash Cr

30000

Depreciation Expense Account Cr

24868

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