Question
What amounts will appear on the lessee’s December 31, 2017, balance sheet relative to the lease contract?
How would the value of the lease liability in part (b) change if Pina also agreed to pay the fixed annual insurance on the equipment of $2,000 at the same time as the rental payments? (Round answers to 0 decimal places, e.g. 5,275.)
The lease liability Problem 21A-2 On January 1, 2017, Pina Company contracts to lease equipment or 5 years agreeing to make a payment of $84.096 at the beginning o each year starting January 1, 2017. The eased equipment to be capitalized at $345,000. The asset s to be amortized on a double-decinin balance basis, and the obligation is to be reduced on an er ective interest basis Pinas ncremental borro ng rate is 6%, and the implicit ate in the lease is 11%, which is known by Pina Title to the equipment trans ers to Pina at the end of the leass. The assot has an estimated useful lifo of 5 years and no residual value. b-f t for 5 years, agreaing to make a paymant of $94.096 at the beginning of each year starting January 1. 2017. The lemant is to b capitalizad at $345,000. Tha asset is to ba 1, 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g.1.25124 and the final answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit January 1. 2017 To record the lease.) To record lease payment. Prepare the journal entries to record amortization of the leased asse and interest expense for the year 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)
Explanation / Answer
2)amounts will appear on the lessee’s December 31, 2017, balance sheet relative to the lease contract = 345000-84096 = $ 260904
3)Present value of annual insurance : PVA11%,5*Annual insurance
= 4.10245*2000
= $ 8205
Total lease liability over the period = 345000+8205= 353205
Amount paid = 84096+2000 = 86096
Lease liability to be reported = 353205-86096 = 267109
Date Account Debit credit 1 jan 2017 Lease equipment 345000 lease liability 345000 [to record lease] 1jan 2017 Lease liability 84096 cash 84096 [to record payment] 31 dec 2017 Interest expense 28699 Interest payable 28699 [Being interest accrued on carrying value [345000-84096]*.11]
