Novak Corporation enters into a 6-year lease of equipment on January 1, 2017, wh

Question

Novak Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of $41,000 each, beginning January 1, 2017. In addition, Novak guarantees the lessor a residual value of $21,300 at lease-end. The equipment has a useful life of 6 years.

Prepare Novak’ January 1, 2017, journal entries assuming an interest rate of 11%. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

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Date

Account Titles and Explanation

Debit

Credit

January 1, 2017

(To record the lease.)

January 1, 2017

(To record first lease payment.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2017

(To record the lease.)

January 1, 2017

(To record first lease payment.)

Explanation / Answer

Journal Entry Date Account Tittle Debit Credit 01-Jan-17 Leased Equipment $203,919.00          Lease payable $203,919.00 (To record the lease.) 01-Jan-17 Lease payable $41,000.00            Cash $41,000.00 To record first lease payment Computation of Minimum Lease Payment Present value of minimum lease payments = Annual payments*PVA factor (for i=11%,n=6)+Guaranteed residual value*PV factor for 6th year, i=11% =(41000*4.6959)+(21300*0.5346)= $203918.90

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