Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2016.

Question

Eastern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2016. Other information: Lease term 4 years Annual payments $87,000 on January 1 each year Life of asset 4 years Implicit interest rate 8% Incremental rate 8% PV, annuity due, 4 periods, 8% 3.5771 PV, ordinary annuity, 4 periods, 8% 3.3121 Hi-Tech's cost of the equipment $311,208 There is no expected residual value. Required: Prepare appropriate journal entries for Hi-Tech Leasing for 2016 and 2017. Assume a December 31 year-end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Answer: January 1, 2016:

Leased asset A/C Dr. $311208 ($87,000 x 3.5771)

To Lease payable A/C $311208

Lease payable A/C Dr. $87,000

To Cash A/C $87,000

December 31, 2016:

Interest expense A/C Dr. $17937 [($311208 - $87,000) x 8%]

To Interest payable A/C $17937

Depreciation expense A/C Dr. $ 77,802 ($311208/4)

To Accumulated depreciation A/C $77802

January 1, 2017:

Interest payable A/C Dr. $17937

Lease payable A/C Dr. $ 69063

To Cash A/C $87,000

December 31, 2017:

Interest expense A/C Dr. $12412 [($311208 - $87,000 - $69063) x 8%]

To Interest payable A/C $12412

Depreciation expense A/C Dr. $ 77802 ($311208/4)

To Accumulated depreciation A/C $77802

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