On January 1, 2018, QuickStream Communications leased telephone equipment from D

Question

On January 1, 2018, QuickStream Communications leased telephone equipment from Digium, Inc. Diglum's cash selling price for the equipment is $1,742,104. The lease agreement specifies six annual payments of $400,000 beginning December 31, 2018, and at each December 31 thereafter through 2023. The six-year lease is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase by the higher of (a) the increase in the Consumer Price Index for the preceding year and (b) 3 percent. The CPl at the beginning of the lease is 130. Digium routinely leases equipment to other firms. The interest rate in these lease arrangements is 10%. (EyofSL PyofSL EVAof$1, P A OSI E AD SI and P ADat SD (Use appropriate factors) from the tables provided.) Required: Prepare the appropriate journal entries for QuickStream to record the lease at its beginning date of January 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required" In the first account field. Round your answers to the nearest whole dollar amount.) View transaction list Journal entry worksheet Record the beginning of the lease for QuickStream Communications Note: Enter debits befor credits. General Journal DebitCredit ate January 01, 2018 S Prey 9 of 13 Next>

Explanation / Answer

Journal entry in the books of Quickstream on Jan 1st 2018,

Telephone Equipment A/c Dr. 1,742,104

To lease liability A/c 1,742,104

The entry is as above because the given lease is a finance lease. The reasons that the same is to be classified as a finance lease are:

1. The estimated useful life of the asset is equal to the lease period

2. The sum total of the present value of the lease payments per year is equal to the cash price of the telephone equipment.

The sum total of the present value factors at 10% interest rate is 4.36 and the instalment amount is 400,000.

And, 400,000*4.36 is 1,742,104.

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