Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 yea

Question

Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2014. Annual rental payments of $72,500 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 12%. 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.

Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2014. Annual rental payments of $72,500 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 12%. 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.

Prepare the journal entry, that should be recorded on December 31, 2014, by Ludwick. (Credit account titles are automatically indented when amount is entered. Do not indent manually. 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.)
Prepare the journal entry, that should be recorded on December 31, 2014, by Ludwick. (Credit account titles are automatically indented when amount is entered. Do not indent manually. 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.)
Prepare the journal entry, that should be recorded on December 31, 2015, by Ludwick. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)











Prepare the journal entry, that should be recorded on December 31, 2015, by Ludwick. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)














(To record annual payment on lease liability.) (To record annual depreciation on assets leased.) SHOW LIST OF ACCOUNTS SHOW LIST OF ACCOUNTS SHOW LIST OF ACCOUNTS LUDWICK STEEL COMPANY Balance Sheet December 31, 2016 LUDWICK STEEL COMPANY Balance Sheet December 31, 2016 Assets $ $ Liabilities $ Open Show Work SHOW LIST OF ACCOUNTS SHOW LIST OF ACCOUNTS SHOW LIST OF ACCOUNTS

Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2014. Annual rental payments of $72,500 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 12%. 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

Journal Entries

Balance sheet 31122016

Annual rental payment 72500 Lease period 5 years Interest rate 9% Incremental Borrowing rate 12% Asset Useful Life 7 Years PV Annuity Due= C*((1-(1+i)^(-n))/i)*(1+i) PV Annuity Due = 72500*((1-(1+0.09)^(-5))/0.09)*(1+0.09) PV Annuity Due = 307380 Cost of Fixed Assets 307380

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