On January 1, 2014, Burke Corporation signed a 8-year noncancelable lease for a
ID: 2467441 • Letter: O
Question
On January 1, 2014, Burke Corporation signed a 8-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $9,501 at the beginning of each year, starting January 1, 2014. The machine has an estimated useful life of 9 years and a $5,330 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 9%, and the lessor’s implicit rate is unknown.
a. Compute the present value of the minimum lease payments.
b. Prepare all necessary journal entries for Burke for this lease through January 1, 2015.
Explanation / Answer
a) Present value of the minimum lease payments.
: $9501 X 6.03295* = $57319
*Present value of an annuity due of 1 for 8 periods at 9%.
b) 1/1/14 Leased Equipment. .................................. 57319
Lease Liability. ................................. 57319
Lease Liability. ......................................... 9501
Cash. .................................................. 9501
2/31/14 Depreciation Expense. ............................ 7165
Accumulated Depreciation— Capital Leases... 7165
($57319 ÷ 8 = $7615)
Interest Expense. ..................................... 4304
Interest Payable. ............................... 4034
[($57319 – $9501) X .09]
1/1/15 Lease Liability. ......................................... 5,330
Interest Payable. ...................................... 4171
Cash. .................................................. 9501
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