Exercise 21-1 Date Account Titles and Explanation Debit Credit 1/1/14 (To record
ID: 2427661 • Letter: E
Question
Exercise 21-1
Date
Account Titles and Explanation
Debit
Credit
1/1/14
(To record the lease.)
(To record first payment.)
12/31/14
(To record depreciation.)
(To record interest.)
1/1/15
(To record second payament.)
Exercise 21-1
On January 1, 2014, Burke Corporation signed a 7-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $9,743 at the beginning of each year, starting January 1, 2014. The machine has an estimated useful life of 8 years and a $5,250 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.
Explanation / Answer
Answer: Computation of PV of minimum lease payments:
$9743 X 5.35526* = $52,176.30
*Present value of an annuity due of 1 for 7 periods at 10%.
1 jan 2014 Leased Equipment A/C Dr. $52176.30
To Lease Liability A/C $52176.30
Lease Liability A/C Dr. $9743
To cash A/C $9743
31 Dec 2014 Depreciation Expense. ............................ 7,453.76
To Accumulated Depreciation— Capital Leases $7453.76
(52176.30/7)
Interest Expense. ..................................... 4243.33
To Interest Payable. ............................... 4243.33
[($52176.30 – $9743) X .10]
1/1/2015
Lease Liability A/C Dr. 5499.67
Interest Payable a/C Dr. $4243.33
To cash A/C $9743
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