(a) Date Account Titles and Explanation Debit Credit December 31, 2014 (To recor
ID: 2448999 • Letter: #
Question
(a)
Date
Account Titles and Explanation
Debit
Credit
December 31, 2014
(To record the lease.)
(To record the first payment.)
Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2014. Annual rental payments of $61,900 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance costs are the obligation of the lessee. The interest rate used by the lessor in setting the payment schedule is 9%; Ludwick’s incremental borrowing rate is 11%. Ludwick is unaware of the rate being used by the lessor. At the end of the lease, Ludwick has the option to buy the equipment for $1, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Ludwick uses the straight-line method of depreciation on similar owned equipment.
Explanation / Answer
Present value of future lease payment = Annual payment *PVAF@11%,5
= 61900 * 4.10245
= $ 253,941.39
Date Title Debit credit dec2014 Fixed asset 253941.39 Lease liability 253941.39 [lease recorded] dec2014 lease liability 61900 cash 61900 [Being first lease payment recorded]Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.