On january 1, 2017, bridgeport corporation signed a 5-year noncancelable lease f

Question

On january 1, 2017, bridgeport corporation signed a 5-year noncancelable lease for a machine. the terms of the lease called for bridgeport to make annual payments of $8,317 at the beginning of each year, starting january 1, 2017. the machine has an estimated useful life of 6 years and a $5,300 unguaranteed residual value. the machine reverts back to the lessor at the end of the lease term. bridgeport uses the straight-line method of depreciation for all of its plant assets. bridgeport's incremental borrowing rate is 10%, and the lessor's implicit rate is unknown.

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Compute the present value of the minimum lease payments.

Prepare all necessary journal entries for bridgeport for this lease through january 1, 2018.

Date.          Account Titles and Explanation.       Debit.           Credit
                   1.
                   2.
                  (To record the lease)
                   1.
                   2.
                  (To record first payment)
Date.           1.
                   2.
                   ( To record depreciation)
                   1.
                   2.
                   ( To record interest)
1/1/18.        1.
                   2.
3.                3.

Explanation / Answer

Answer:- Calculation of present value of the minimum lease payments Year Annual Installment Present Value factor Present Value Jan-17                               8,317                                       1.00                 8,317 Jan-18                               8,317                                       0.91                 7,561 Jan-19                               8,317                                       0.83                 6,874 Jan-20                               8,317                                       0.75                 6,249 Jan-21                               8,317                                       0.68                 5,681 Total 34,681 Journal Entries in books of bridgeport Date Particulars Debit Credit Jan-17 Machine Dr. 34,681 To Lessor 34,681 (Being finance lease purchased) Jan-17 Lessor Dr. 8,317 To Bank 8,317 (being first payment done) Dec-17 Depreciation             Dr.                               3,468 To machine 3,468 (being depreciation booked) Dec-17 Finance charge           Dr.                               2,636 To Bank                                     2,636 (Being Interest booked) Jan-18 Lessor Dr. 8,317 To Bank 8,317 (being Second year lease payment done) Dec-18 Depreciation             Dr.                               3,468 To machine                                     3,468 (being depreciation booked) Dec-18 Finance charge           Dr.                               2,068 To Bank                                     2,068 (Being Interest booked) Amortization Schedule Year Finance lease value Annual Payments Interest Principal Balance Jan-17                             34,681                                     8,317                        -                     8,317                 26,364 Jan-18                             26,364                                     8,317                 2,636                   5,681                 20,683 Jan-19                             20,683                                     8,317                 2,068                   6,249                 14,434 Jan-20                             14,434                                     8,317                 1,443                   6,874                   7,561 Jan-21                               7,561                                     8,317                    756                   7,561                          -

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