Sage Hill Company leased equipment from Costner Company, beginning on December 3

Question

Sage Hill Company leased equipment from Costner Company, beginning on December 31, 2016. The lease term is 6 years and requires equal rental payments of $59,309 at the beginning of each year of the lease, starting on the commencement date (December 31, 2016). The equipment has a fair value at the commencement date of the lease of $290,000, an estimated useful life of 6 years, and no estimated residual value. The appropriate interest rate is 9%.

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Prepare Sage Hill’s 2016 and 2017 journal entries, assuming Sage Hill depreciates similar equipment it owns on a straight-line basis.

Explanation / Answer

In the books of Sage Hill Date Particulars Debit Credit 2016 Dec 31 Leased equipment $ 290,000.00 Lease Liability $ 290,000.00 (59309 x 4.88965) = $290,000 at 9% for 6 years PVA due 2017 Lease Liability $    38,546.81 Dec 31 Interest Expense(290000-59309)x 9% = $    20,762.19 Cash $    59,309.00 Dec 31 Depreciation Expense $    48,333.33 Accumulated Depreciation-Leased Equipment $    48,333.33 (290000 ÷ 6 Years)

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