Hughey Co. as lessee records a capital lease of machinery on January 1, 2014 (th

Question

Hughey Co. as lessee records a capital lease of machinery on January 1, 2014 (the machinery has a seven-year life). The seven annual lease payments of $700,000 are made at the beginning of each year. The present value of the lease payments at 10% is $3,408,000. Hughey uses the effective-interest method of amortization and straight -line depreciation (no residual value).

Instructions (Round to the nearest dollar.)

(a) Prepare an amortization table for 2014 and 2015.

(b) Prepare all of Hughey’s journal entries for January 1, 2014, December 31, 2014 and January 1, 2015.

Explanation / Answer

Answer:(a)

Answer:(b)

Leased Equipment . ...................................................................... 3,408,000

   To Lease Liability . ................................................................. 3,408,000

Interest Expense . ......................................................................... 340,800

Lease Liability . ............................................................................. 359,200

    To Cash . ..............................................................................                   . 700,000

Depreciation Expense . ................................. 486857.14

      To Accumulated Depreciation . ............................................. 486857.14

Date Annual Payment 10% Interest Reduction of liability Lease liability 1-Jan-14 3408000 1-Jan-14 700000 340800 359200 3048800 1-Jan-15 700000 304880 395120 2653680

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