A company enters into a lease contract with an equipment manufacturer for a cran
ID: 2641500 • Letter: A
Question
A company enters into a lease contract with an equipment manufacturer for a crane with a FMV of $125,000. The terms of the agreement are:
The lease payments call for $20,000 payments made annually. The term is 10 years. Assume that the lease meets the criteria for a capital lease. The lessor informs the lessee that the interest rate is 9.6%. Assume the asset is depreciated using straight-line depreciation over 10 years with zero salvage value
Compute an amortization table for the accounting department to use in making their annual journal entries relative to the lease obligation. 5 Point Bonus for general ledger entries.
Year
Beg. Lease Liability
Payment
Interest Expense
Principle
End. Lease Liability
Depreciation
Accum. Depreciation
1
$125,000
2
3
4
5
6
7
8
9
10
Totals
Year
Beg. Lease Liability
Payment
Interest Expense
Principle
End. Lease Liability
Depreciation
Accum. Depreciation
1
$125,000
2
3
4
5
6
7
8
9
10
Totals
Explanation / Answer
(1) Computation of Amortzation table.We have,
Note1: At the end of 10th year, interest is difference between Installement amount and principle amount(i.e 20,000 - 18,176 = $ 1,824)
Note 2: Deapreciation amount = 125,000 /10 = $ 12,500 per year for 10 years,
(2) Preparation of Journal entry of capital lease.We have,
(a) At the inception of Lease:
Fixed Asset Account Dr 125,000
Capital lease Liability Cr 125,000
( Being entry is passed at fair market value of equipment)
(b) Yearly Journal entries for 1st years.We have,
Capital Lease Liability Dr $ 8,000
Interest Expenses Dr $ 12,000
Cash Account Cr $ 20,000
(c) Yearly Journal entries for 2nd years.We have,
Capital Lease Liability Dr $ 8,768
Interest Expenses Dr $ 11,232
Cash Account Cr $ 20,000
(d) Yearly Journal entries for 3rd years.We have,
Capital Lease Liability Dr $ 9,608
Interest Expenses Dr $ 10,390
Cash Account Cr $ 20,000
(e) Yearly Journal entries for 4th years.We have,
Capital Lease Liability Dr $ 10,532
Interest Expenses Dr $ 9,468
Cash Account Cr $ 20,000
(f) Yearly Journal entries for 5th years.We have,
Capital Lease Liability Dr $ 11,543
Interest Expenses Dr $ 8,457
Cash Account Cr $ 20,000
(g) Yearly Journal entries for 6th years.We have,
Capital Lease Liability Dr $ 12,652
Interest Expenses Dr $ 7,348
Cash Account Cr $ 20,000
(h) Yearly Journal entries for 7th years.We have,
Capital Lease Liability Dr $ 13,866
Interest Expenses Dr $ 6,134
Cash Account Cr $ 20,000
(i) Yearly Journal entries for 8th years.We have,
Capital Lease Liability Dr $ 15,197
Interest Expenses Dr $ 4,803
Cash Account Cr $ 20,000
(j) Yearly Journal entries for 9th years.We have,
Capital Lease Liability Dr $ 16,656
Interest Expenses Dr $ 3,344
Cash Account Cr $ 20,000
(k) Yearly Journal entries for 10th years.We have,
Capital Lease Liability Dr $ 18,176
Interest Expenses Dr $ 1,824
Cash Account Cr $ 20,000
Years Beg.Lease Liability($) Payment($) Interest Expenses($) Principle($) End Lease Liability($) Depreciation Accum.Depreciation 1 125,000 20,000 12,000 8,000 117,000 12,500 12,500 2 117,000 20,000 11,232 8,768 108,232 12,500 25,000 3 108,232 20,000 10,390 9,608 98,622 12,500 37,500 4 98,622 20,000 9,468 10,532 88,090 12,500 50,000 5 88,090 20,000 8,457 11,543 76,547 12,500 62,500 6 76,547 20,000 7,348 12,652 63,895 12,500 75,000 7 63,895 20,000 6,134 13,866 50,029 12,500 87,500 8 50,029 20,000 4,803 15,197 34,832 12,500 100,000 9 34,832 20,000 3,344 16,656 18,176 12,500 112,500 10 18,176 20,000 1,824 18,176 0 12,500 125,000 Totals 200,000 125,000Related Questions
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