On January 1, 2017, Pearl Corporation signed a 5-year noncancelable lease for a

Question

On January 1, 2017, Pearl Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Pearl to make annual payments of $8,148 at the beginning of each year, starting January 1, 2017. The machine has an estimated useful life of 6 years and a $5,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Pearl uses the straight-line method of depreciation for all of its plant assets. Pearl’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

Compute the present value of the minimum lease payments.

Prepare all necessary journal entries for Pearl for this lease through January 1, 2018.

Explanation / Answer

All answers rounded off to zero decimals 1 4.10245*8148 = 33427 Date General Journal Debit Credit 2 01/01/2017 Leased Equipment 33427 Lease liability 33427 4.10245*8148 Lease liability 8148 Cash 8148 12/31/2107 Depriciation Expense 6685 Accumulated Depreciation—Capital Leases 6685 33426/5 Interest Expense 2781 Interest Payable 2781 (33427-8148)*11% Lease liability 5367 Interest Expense 2781 Cash 8148

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