Aldridge Enterprises has a long-standing policy of acquiring company equipment b

Question

Aldridge Enterprises has a long-standing policy of acquiring company equipment by leasing. Early in 2013, the company entered into a lease for a new milling machine. The lease stipulates that annual payments will be made for five years. The payments are to be made in advance on December 31 of each year. At the end of the 5-year period, Aldridge may purchase the machine. Company financial records show the incremental borrowing rate to be less than the implicit interest rate. The estimated economic life of the equipment is 12 years. Aldridge uses the calendar year for reporting purposes and straight-line depreciation for other equipment. In addition, the following information about the lease is also available:

Give the journal entries that would be made on Aldridge's books for the first two years of the lease. Round all answers to the nearest whole dollar. For compound transactions, if an amount box does not require an entry, leave it blank.

Assume that the purchase option is exercised at the end of the lease. Give the Aldridge journal entry necessary to record the exercise of the option. The actual fair value of the milling machine at the end of the lease is $95,000. On the date the purchase option is exercised, the undiscounted sum of future cash flows expected from the machine is $125,000. Round all answers to the nearest whole dollar

Explanation / Answer

a Annual Rental (PMT) $55,000 Nper 6 Payment in advance (5 years + 1) Rate 10.00% Present Value Of lease(PV(10%,6,-55000,0,1) $263,493.27 Present value of guaranteed residual value: Residual Value (FV) $75,000 Nper 6 Rate 10.00% Present Value Of Residual(PV(10%,6,-75000,0) $42,335.54 Present (capitalized) value of lease: Present Value of Lease $263,493.27 Present Value Of Residual $42,335.54 Present (capitalized) value of lease: $305,828.82 Date Desceiption Debit Credit Jan 1, 2013 Leased Equipment $305,829 Obligations under Capital Leases $305,829 To record capital lease. Jan 1, 2013 Obligations under Capital Leases $55,000 Cash $55,000 To record first lease payment. Dec. 31 Obligations under Capital Leases $29,917 Interest Expense ($305,829 -$55,000)x10% $25,083 Cash $55,000 To record second lease payment. Amortization Expense on Leased Equipment $38,471 Accumulated Amortization of Leased equipment $38,471 ($305,829 - $75,000)/6 Dec 31, 2014 Obligations under Capital Leases $32,909 Interest Expense ($305,829 -$55,000-$29,917)x10% $22,091 Cash $55,000 To record second lease payment. Amortization Expense on Leased Equipment $38,471 Accumulated Amortization of Leased equipment $38,471 ($305,829 - $75,000)/6

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