5. On January 1, 2013, Sans Serif Publishers, Inc., a computer services and prin

Question

5. On January 1, 2013, Sans Serif Publishers, Inc., a computer services and printing firm, leased printing equipment from First Lease Corp. The lease agreement specifies six annual payments of $100,000 beginning January 1, 2013, the inception of the lease, and at each January 1 thereafter. The useful life of the equipment is estimated to be six years. Before deciding to lease, Sans Serif considered purchasing the equipment for its cash price of $479,079. If funds were borrowed to buy the equipment, the interest rate would have been 10%. Record the journal entries for both the lessee and lessor for years 1 and 2.

Explanation / Answer

Since the lease term is equal to the expected useful life of the equipment (>75%), the transaction must be recorded by the lessee as a capital lease Journal Entries in the book Sans Serif Publishers, Inc. (Lessee) Debit Credit Year 1 Jan 1,2013 Leased equipment (PV of payments) $479,079.00 Lease payable $479,079.00 Dec 31,2013 Lease payable $100,000.00 Cash $100,000.00 Year 2 Dec 31,2014 Interest Expenses ($479,079 - $100,000) x 10% $37,907.90 Lease Payable $62,092.10 Cash $100,000.00 Dec 31,2014 Depreciation expense $79,846.50 Accumulated depreciation($479,079 ÷6 = $79,847) $79,846.50 Journal Entries in the books of First Lease Corp (Lessor) Year 1 Jan 1,2013 Lease receivable (PV of payments) $479,079.00 Inventory of equipment (Lessor’s cost) $479,079.00 Dec 31,2013 Cash $100,000.00 Lease receivable $100,000.00 Year 2 Dec 31,2014 Cash $100,000.00 Lease receivable $62,092.10 Interest Revenue $37,907.90

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