On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasi

Question

On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a five-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $429,029 and has an expected economic life of six years. Aqua expects the residual value at December 31, 2018, to be $65,000. Negotiations led to Maywood guaranteeing a $92,500 residual value. Equal payments under the lease are $130,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Maywood is aware that Aqua used a 6% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. & 2. Prepare the appropriate entries for Maywood on January 1, 2018 and December 31, 2018, related to the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list 1 Record the beginning of the lease for Maywood Hydraulics Record the amortization expense for Maywood Hydraulics 2 3 Record the lease payment and interest expense for Maywood Hydraulics. Credit

Explanation / Answer

Answer

Caculation of the right of use assets and lease liability:

PV factor for lease payments (4.2214*130000)                                  =548782            

Add:PV factor for Cash payment under

residual value guarantee(0.7473*$27500)                                     =20551

Present value of expected lease payments                  =569333

Cash payment under residual value guarantee =92500-65000 = 27500

The appropriate entries for Maywood on January 1, 2018 and December 31, 2018:

Date Particulars Dr Cr January 1, 2018 Right-of-use-asset $569333 Lease payable $569333 (Being record the lease) December 31, 2018 Amortization expenses(569333/5) $113867 Right-of-use-asset $113867 (Being record Amortization expenses for first year ) Interest expenses(569333*6%) $28160 Lease payable $101840 Cash (Equal annual payments) $130000 (Being annual lease payment )

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