High Time Tours leased rock-climbing equipment from Adventures Leasing on Januar

Question

High Time Tours leased rock-climbing equipment from Adventures Leasing on January 1, 2018. High Time has the option to renew the lease at the end of two years for an additional three years for $8,000 per quarter. Adventures purchased the equipment at a cost of $198,375.(FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Related Information:

Lease term

2 years (8 quarterly periods)

Lease renewal option for an additional

3 years at $8,000 per quarter

Quarterly lease payments

$15,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.

Economic life of asset

5 years

Interest rate charged by the lessor

8%

Record the beginning of the lease for High Time.                                   DR        CR

Record the lease payment for High Time.                                                DR         CR

Record the lease and interest payment for High Time                                   DR         CR

Record the amortization of right-to-use asset for High Time.                       DR         CR

Related Information:

Lease term

2 years (8 quarterly periods)

Lease renewal option for an additional

3 years at $8,000 per quarter

Quarterly lease payments

$15,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.

Economic life of asset

5 years

Interest rate charged by the lessor

8%

Explanation / Answer

Since there is a renewal option after 2 years of lease, and the renewal rate of lease is significantly lower than current rate, so there is chances of lease renewal and lease term will be considered for 5 years. For first 2 years 15000 x PVAD $1, 2%, 8 15000 x 7.47199 = $ 112,079.85 For 3 years 8000 x PVAD $1, 2%,12 x PV $1, 2%, 8 8000 x 10.78685 x 0.85349 = $    73,651.75 $        185,732 rounded [i = 2% (8% ÷ 4) because the lease calls for quarterly payments.] Date Account titles and explanation Debit Credit Jan 1, 2018 Right-of-use equipment $185,732 Lease liability (present value calculated above) $185,732 Lease liability $15,000 Cash (Lease Payment) $15,000 Apr 1, 2018 Interest expense (2% x [$185,732 – 15,000]) $        3,415 Lease liability (difference) $     11,585 Cash (lease payment) $          15,000 Amortization expense ($185,732 ÷ 20 quarters) $        9,287 Right-of-use equipment $            9,287 Note: I have tried my best for correct solution and work , still you need any further help, please ask in comment and don’t forget to rate positively.

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