Accounting for Operating and Capital Leases On January 1, 2014, Springer, Inc.,

Question

Accounting for Operating and Capital Leases On January 1, 2014, Springer, Inc., entered into two lease contracts. The first lease contract was a 6-year lease for computer equipment with $15,000 annual lease payments due at the end of each year. Springer took possession of the equipment on January 1, 2014. The second lease contract was a 6-month lease, beginning January 1, 2014, for warehouse storage space with $1,000 monthly lease payments due the first of each month. Springer made the first month's payment on January 1, 2014. The present value of the lease payments under the first contract is $74,520. The present value of the lease payments under the second contract is $5,853. Required a. Assume that the first lease contract is a capital lease. Prepare the appropriate journal entry for this lease on January 1, 2014. Date Description Debit Credit 1/1/2014 Answer Answer Answer Answer Answer Answer b. Assume the second lease contract is an operating lease. Prepare the proper journal entry for this lease on January 1, 2014. Date Description Debit Credit 1/1/2014 Answer Answer Answer Answer Answer Answer

Explanation / Answer

A) Journal entries for 1st lease contract as on january 1,2014. (capital lease)

Given present value of the lease payments under first lease contract = $74,520

annual lease payment is $15000 for 6years = $15000 *6 years = $90000

therefore the capital lease liability of first contract is $90000

Total Interest expence = $90000 - $74520 =$15480

Assumed that interest is paid equally through out the lease period i.e $15480 / 6 years =$2580 and interest is included in the annual payment

Journal entries are as follows

jan1           Computer equipment a/c                   $90000

                    To Capital lease liability a/c                            $90000                                              

(being asset being recorded and the lease liability)

                Capital lease liability a/c                    $12420

                 Interest expence a/c                       $2580    

                      To account payable a/c                                  $15000

B) journal entries for second lease contract on january 1,2014

Given present value of lease payments under second lease contract = $5853

monthly lease payment =$1000 for 6 months, total lease payment =$1000 * 6months = $6000

Interest expence = $6000 - $5853 = 147

Journal entries are as follows

unlike capital lease in operating lease the asset is not recorded

jan1            Rent a/c                                $1000

                     To Cash a/c                                      $1000

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