Exercise 21-11 Laura Leasing Company signs an agreement on January 1, 2017, to l
ID: 2411769 • Letter: E
Question
Exercise 21-11
Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Skysong Company. The following information relates to this agreement.
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Prepare all of the journal entries for the lessee for 2017 and 2018 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (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 2 decimal places, e.g. 15.25.)
Date
Account Titles and Explanation
Debit
Credit
(To record the lease.)
(To record lease payment.)
(To record insurance payment.)
(To record property tax payment.)
(To record interest.)
(To record depreciation.)
(To reverse interest.)
(To record lease payment.)
(To record insurance payment.)
(To record property tax payment.)
(To record interest.)
(To record depreciation.)
1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2017, is $83,100. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,600, none of which is guaranteed. 4. Skysong Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $870 to Rocky Mountain Insurance Company for insurance and (2) $1,590 to Laclede County for property taxes. 5. The agreement requires equal annual rental payments of $18,797.04 to the lessor, beginning on January 1, 2017. 6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee. 7. Skysong Company uses the straight-line depreciation method for all equipment. 8. Skysong uses reversing entries when appropriate.Explanation / Answer
Fair Value of Lease = Annual Rentals*PVAF(10%, 5 yrs) (beginning of period)
= $18,797.04*4.16987 = $78,381.21
Journal Entries (Amounts in $)
Date Account Titles and Explanation Debit Credit 1/1/17 Leased Equipment 78,381.21 Lease Liability 78,381.21 (To record the lease) Lease Liability 18,797.04 Cash 18,797.04 (To record lease payment) During 2017 Insurance Expense 900 Cash 900 (To record insurance payment) Property Tax Expense 1,600 Cash 1,600 (To record property tax payment) 12/31/17 Interest Expense [($78,381.21-$18,797.04)*10%] 5,958.42 Interest Payable 5,958.42 (To record interest) Depreciation Expense ($78,381.21/5 yrs) 15,676.24 Accumulated Depreciation-Capital Leases 15,676.24 (To record depreciation) 1/1/18 Interest Payable 5,958.42 Interest Expense 5,958.42 (To reverse interest) 1/1/18 Lease Liability ($18,797.04-$5,958.42) 12,838.62 Interest Expense 5,958.42 Cash 18,797.04 (To record lease payment) During 2018 Insurance Expense 900 Cash 900 (To record insurance payment) Property Tax Expense 1,600 Cash 1,600 (To record property tax payment) 12/31/18 Interest Expense [($78,381.21-$18,797.04-$12,838.62)*10%] 4,674.56 Interest Payable 4,674.56 (To record interest) Depreciation Expense ($78,381.21/5 yrs) 15,676.24 Accumulated Depreciation-Capital Leases 15,676.24 (To record depreciation)Related Questions
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