Package Express Service properly capitalized at $220,000 two large trucks it had
ID: 2553441 • Letter: P
Question
Package Express Service properly capitalized at $220,000 two large trucks it had leased on January 1. The trucks have a 10-year useful life. Title to the trucks pass to Package at the end of the 8-year lease term. Allied depreciates other similar trucks on the straight-line method with no salvage value.
The lease agreement calls for annual payments of $27,500 at the beginning of each year of the lease term. The interest rate implicit in the lease (which is known by the lessee) is 10%.
A) Prepare the journal entries to record:
i. the first lease payment at the signing of the lease on January 1,
ii. the second lease payment on December 28 of the current year (including interest expense) and amortization expense for the current year,
iii. the third lease payment at the end of the second year.
B) What is the current and long-term lease liability Package should report on its current year-end balance sheet?
Explanation / Answer
ENTRIES DEBIT CREDIT
1st year
Lessor 27500
Bank 27500
2nd year
interest=220000*10/100=22000
total payment=27500+22000=49500
depriciation=220000/10=22000(straight line method)
lessor 49500
bank 49500
profit&loss 22000
trucks 22000
3rd year
lessor 49500
bank 49500
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