PROBLEM #3 On 12/31/16, Hall Inc entered into a lease agreement with Oates Co. H

Question

PROBLEM #3 On 12/31/16, Hall Inc entered into a lease agreement with Oates Co. Hall leased a machine from Oates for 9 years. The estimated useful life of the machine is 9 years. At the end of the 9 year lease term, ownership of the machine will transfer back to Oates. The lease agreement calls for annual payments of $150,000, to begin on 12/31/16. The borrowing rate is 10%. Rounded present value factor of an annuity due is 6.33 at 10%. a. Prepare a lease amortization table for 12/31/16&12/31/17. b. Prepare journal entries for both Hall&Oates; for 12/3 1/16 & 12/31/17

Explanation / Answer

Lease amortization schedule Year Annual Lease payments PVIF@10% Present Value Principal oustanding Principal paid Interest paid 950238.9297 0 150000 1 150000.0 800238.9297 150000 0 1 150000 0.909091 136363.6 730262.8227 69976.11 80023.89 2 150000 0.826446 123966.9 653289.1049 76973.72 73026.28 3 150000 0.751315 112697.2 568618.0154 84671.09 65328.91 4 150000 0.683013 102452.0 475479.817 93138.2 56861.8 5 150000 0.620921 93138.2 373027.7986 102452 47547.98 6 150000 0.564474 84671.1 260330.5785 112697.2 37302.78 7 150000 0.513158 76973.7 136363.6364 123966.9 26033.06 8 150000 0.466507 69976.1 0 136363.6 13636.36 9 6.334926 0.0 0 0 Lease will be recognised by 950238.9 Since lease duration is equal to its useful life, it will be recognised as Capital Lease In the Books of Hall Date/S.N. Account title & Explanation Debit Credit Amount in $ Amount in $ December 31, 2016 Lease receivable 950238.9 Machinery 950238.9 Cash 150000 Lease Receivable 150000 December 31, 2017 Cash 150000 Finance/Interest Income 80023.89 Lease receivable 69976.11 In the Books of Oates Co. Date/S.N. Account title & Explanation Debit Credit Amount in $ Amount in $ December 31, 2016 Leased Asset(Machinery) 950238.9 Leased Liability 950238.9 Leased Liability 150000 Cash 150000 December 31, 2017 Leased Liability 69976.1 Interest payment 80023.9 lease rental 150000 Lease rental 150000 Cash 150000 Depreciation 105582.1 Assuming it to be straightline depreciation Leased asset(Machinery) 105582.1 As per Chegg Poliy we are supposed to answer not more than one questions. Thank you.

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