On January 1, 2018, Betty DeRose, Inc leased office furnlture and equipment from
ID: 2518978 • Letter: O
Question
On January 1, 2018, Betty DeRose, Inc leased office furnlture and equipment from Young Leasing Company. The terms of the lease require annual payments of $50,000 for 10 years with the first payment being due on December 31, 2018. Assume the interest rate on the lease is 10% and the lease qualifies as a capital lease. Betty DeRose depreciates all assets using the double-declining balance method Calculate the balance in the lease liability account on December 31, 2019 after the second lease payment is made Enter your answer with two places after the decimal point (i.e., 10,123.40)Explanation / Answer
Cost of Assets = $ 307228.35 ie The present value of all the 10 payments of $ 50000 each at the rate of 10%
At the initiation of capital lease journal entry will be
Office furniture & Equipment. Debit. $ 307228.36
Capital lease liabilities. Credit $ 307228.36
On 1 st payment of lease rent (December 31 , 2018)
Capital lease liabilities. Debit $19277.16
Interest expenses. Debit $ 30722.84
Cash. Credit. $ 50000
Calculation of Interest for year 1
Total outstanding at the 1st year end. $ 307228.36
Interst rate 10% per annum
INTEREST =. $ 307228.36*10%. = $ 30722.84
So Total lease payment for year 1 = $ 50000
less: Interest. ($ 30722.84)
Capital payment. $ 19277.16
Outstanding capital at the beginning of year 2 (January 1, 2019)= . $ 307228.36- $ 19277.16 = $ 287951.20
Journal entry as on 31 st December 2019 on 2nd payment
CAPITAL LEASE LIABILITIES. DEBIT. $ 21204.88
INTEREST EXPENSE. DEBIT. $ 28795.12
Cash. Credit. $. 50000
Calculation of interest for second year
Outstanding balance at the beginning of second year. $ 287951
Interest rate 10%
Interest. =. $ 287951.20* 10%. = $ 28795.12
Lease payments. =. $ 50000
Less interest. =. ($ 28795.12)
Capital payment. =. $ 21204.88
So the Balance in capital lease liabilities account after 2nd year lease payments
OUTSTANDING AT THE BEGINNING OF SECOND YEAR. =. $ 287951.12
Less : PAYMENT OF CAPITAL IN SECOND YEAR. =. ($ 21204.88)
Balance as on 31 December 2019 after 2nd payment. = $ 266746.24
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