Larkspur, Inc. has entered an agreement to lease an old warehouse with a useful

Question

Larkspur, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $41,000 from United Corporation. The agreement stipulates the following.

Larkspur paid legal fees of $3,000 in executing the lease.

Table 6.5 PRESENT VALUE OF AN ANNUITY DUE OF 1

Assuming Larkspur’s incremental borrowing rate is 8% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Larkspur.

Rental payments of $9,508 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease. Larkspur must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $800, though these costs vary from year to year. Larkspur must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse.

Larkspur paid legal fees of $3,000 in executing the lease.

8% 890 9% 10% 11% 12% 15% (n) Periods 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.92593 1.91743 1.90909 190090 1.89286 1.86957 2 2.78326 2.75911 2.73554 2.71252 2.69005 2.62571 3 3.57710 3.53130 3.48685 3.44371 3.40183 3.28323 4 4.31213 4.23972 4.16986 4.10245 4.03735 3.85498 5 4.99271 4.88965 4.790794.69590 4.60478 4.35216 6 5.62288 5.48592 5.355265.23054 5.11141 4.78448 7

Explanation / Answer

At 8% borrowing rate.

For first year total payment is = 9508 + 500 + 3000= 13008

FOr remaining 4 years payment is = 9508 + 500= 10008 per year

Total liability using present value method = 13008/1 (as payment is at start of year 1) + 48704 (PV of 10008 for 4 years) = 61712

Accounting entry

Right to use of asset Debit = 61712

Cash Credit= 13008

Lease liability credit= 48704

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