On 1/1/2018 Pauly Bleeker Inc. leases (as the lessee) equipment with a fair valu
ID: 2518036 • Letter: O
Question
On 1/1/2018 Pauly Bleeker Inc. leases (as the lessee) equipment with a fair value of $50,000 and a residual value of $2,000 (which is guaranteed). The lease is capitalized over four years with an interest rate of 10% following the schedule below. Ownership reverts to the lessor at the end of the lease term. The present value of the minimum lease payments equals $50,000. Pauly Bleeker depreciates all fixed assets on a straight-line basis.
Pauly Bleeker, Inc. Lease Amortization Schedule (Annuity-Due Basis)
Date
Lease payment
Interest
Reduction, lease liability
Lease liability
1/1/18
$50,000.00
1/1/18
$13,947.82
$-0-
$13,947.82
36,052.18
1/1/19
13,947.82
3,605.22
10,342.60
25,709.58
1/1/20
13,947.82
2,570.96
11,376.86
14,332.72
1/1/21
13,947.82
1,433.27
12,514.55
1,818.18
12/31/21
-0-
181.82
1,818.18
-0-
On 12/31/21 when Pauly Bleeker returns the equipment, it has a fair value of $1,500.
What journal entries should Pauly Bleeker record when the equipment is returned?
12/31/21
Pauly Bleeker, Inc. Lease Amortization Schedule (Annuity-Due Basis)
Date
Lease payment
Interest
Reduction, lease liability
Lease liability
1/1/18
$50,000.00
1/1/18
$13,947.82
$-0-
$13,947.82
36,052.18
1/1/19
13,947.82
3,605.22
10,342.60
25,709.58
1/1/20
13,947.82
2,570.96
11,376.86
14,332.72
1/1/21
13,947.82
1,433.27
12,514.55
1,818.18
12/31/21
-0-
181.82
1,818.18
-0-
Explanation / Answer
Journal Entry Date Account title and Explanation Debit Credit 31/12/2021 Accumulated Amortisation of Leased Equipment ($50000-$2000)/4*4 $498,000.00 Obligation Under Capital Lease $1,818.18 Interest Expense $181.82 Leased Equipment $50,000.00
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