Shamrock Company leased equipment from Costner Company, beginning on December 31

Question

Shamrock Company leased equipment from Costner Company, beginning on December 31, 2016. The lease term is 7 years and requires equal rental payments of $38,869 at the beginning of each year of the lease, starting on the commencement date (December 31, 2016). The equipment has a fair value at the commencement date of the lease of $230,000, an estimated useful life of 7 years, and no estimated residual value. The appropriate interest rate is 6%. Prepare Shamrock's 2016 and 2017 journal entries, assuming Shamrock depreciates similar equipment it owns on a straight-line basis. (Credit account titles are automatically Indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. S,275.) Date Account Titles and Explanation Debit Credit 12/31/16 (To record lease liability) 12/31/16 (To record lease payment 12/31/17

Explanation / Answer

Solution:

Present value of lease payment = Annual rent payment * Cumulative PV factor for annuity due at 6% for 7 periods
= $38,869 * 5.917324 = $230,000

Journal Entries - Shamrock Company Date Particulars Debit Credit 31-Dec-16 Leased Equipment Dr $230,000.00        To Lease liability $230,000.00 (To record truck purchased on lease) 31-Dec-16 Lease liability Dr $38,869.00        To Cash $38,869.00 (To record first lease payment) 31-Dec-17 Lease liability Dr $27,401.00 Interest Expense Dr ($230,000 - $38,869)*6% $11,468.00        To Cash $38,869.00 (To record interest expense and 2nd lease payment) 31-Dec-17 Depreciation Expense Dr $32,857.00        To Accumulated depreciation - Equipment $32,857.00 (To record amortization of right to use asset)

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