The following facts pertain to a noncancelable lease agreement between Coronado

Question

The following facts pertain to a noncancelable lease agreement between Coronado Leasing Company and Whispering Company, a lessee. Inception date: Annual lease payment due at the beginning of May 1, 2017 $23,400.83 $3,900 each year, beginning with May 1, 2017 Bargain-purchase option price at end of lease term Lease term Economic life of leased equipment Lessor's cost Fair value of asset at May 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate 5 years 10 years $58,000 $100,000 1096 10% The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. The expected residual value of the equipment at the end of 5 (10) years is $12,000 ($0)

Explanation / Answer

**Depreciation : [cost -residual value ]/lease term

      =[100000-12000]/5

       = 17600

Date Account Debit credit may 1 2017 Leased equipment 100000 Lease liability 100000 may 1 2017 Lease liability 23400.83 cash 23400.83 31 dec 2017 Interest expense 5106.61 Interest payable 5106.61 [being interest accrued for 8 months :7659.92*8/12] 31 dec 2017 Depreciation expense 11733.33 Accumulated depreciation -leased equipment 11733.33 [depreciation recorded][17600*8/12] 1/1/2018 Interest payable 5106.61 Interest expense 5106.61 [Reversing entry made] 5/1/2018 Lease liability 15740.91 Interest expense 7659.92 cash 23400.83 [second lease payment made] 31 dec 2018 Interest expense 4057.22 Interest payable 4057.22 [interest accrued for 8 months 6085.83*8/12] 31 dec 2018 Depreciation expense 17600 Accumulated depreciation -leased equipment 17600

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