On January 2, 20X1, Elsee Co. leased equipment from Grant, Inc. Lease payments a
ID: 2341064 • Letter: O
Question
On January 2, 20X1, Elsee Co. leased equipment from Grant, Inc. Lease payments are $100,000, payable annually every December 31 for twenty years. Title to the equipment passes to Elsee at the end of the lease term. The lease is noncancellable.
The equipment has a $750,000 carrying amount on Grant’s books. Its estimated economic life was twenty-five years on January 2, 20X1.
The rate implicit in the lease, which is known to Elsee, is 10%. Elsee’s incremental borrowing rate is 12%.
Elsee uses the straight-line method of depreciation.
The rounded present value factors of an ordinary annuity for twenty years are as follows:
Required:
Prepare the necessary journal entries to be recorded by Elsee for:
Entering into the lease on January 2, 20X1.
Making the lease payment on December 31, 20X1.
Expenses related to the lease for the year ended December 31, 20X1.
Making the lease payment on December 31, 20X2.
Explanation / Answer
Leased amortization schdeule Year Annual Lease Payment PVIF@10% Present value Interest Depreciation on Lease 0 1 20 100000 0.909090909 90909.0909 9090.90909 42567.8186 19 100000 0.826446281 82644.6281 17355.3719 42567.8186 18 100000 0.751314801 75131.4801 24868.5199 42567.8186 17 100000 0.683013455 68301.3455 31698.6545 42567.8186 16 100000 0.620921323 62092.1323 37907.8677 42567.8186 15 100000 0.56447393 56447.393 43552.607 42567.8186 14 100000 0.513158118 51315.8118 48684.1882 42567.8186 13 100000 0.46650738 46650.738 53349.262 42567.8186 12 100000 0.424097618 42409.7618 57590.2382 42567.8186 11 100000 0.385543289 38554.3289 61445.6711 42567.8186 10 100000 0.350493899 35049.3899 64950.6101 42567.8186 9 100000 0.318630818 31863.0818 68136.9182 42567.8186 8 100000 0.28966438 28966.438 71033.562 42567.8186 7 100000 0.263331254 26333.1254 73666.8746 42567.8186 6 100000 0.239392049 23939.2049 76060.7951 42567.8186 5 100000 0.217629136 21762.9136 78237.0864 42567.8186 4 100000 0.197844669 19784.4669 80215.5331 42567.8186 3 100000 0.17985879 17985.879 82014.121 42567.8186 2 100000 0.163507991 16350.7991 83649.2009 42567.8186 1 100000 0.148643628 14864.3628 85135.6372 42567.8186 8.51356372 851356.372 1148643.63 Date Account Title & explanation Debit Credit Amount in $ Amount in $ January 2, 20X1 Leased Asset(Equipment) 851356.372 Lease Payable 851356.372 To record the inception of lease OR As per annuity given in the question it could be following January 2, 20X1 Leased Asset(Equipment) 850000 Lease Payable 850000 To record the inception of lease December 31, 20X1 Lease Payable 14864.36 Interest expense(on Lease Payable) 85135.64 Cash 100000 To record the annual payment towards lease December 31, 20X1 Lease Amortization 42567.8186 Leased Asset(Equipment) 42567.8186 To record the Lease amortization expense December 31, 20X2 Lease Payable 16350.80 Interest expense(on Lease Payable) 83649.20 Cash 100000 To record the annual payment towards lease Note : There exists alternative solution in which leased amortization schedule is prepared in discount model. It means the years will be reversed. For instance the year 20 will become year 1 and year 19 will year 2. It would change the interest & Lease Payable amount in the journal entries. Thank You
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