Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment

Question

Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Bramble Company. The following information relates to this agreement.

Assume that the expected residual value at the end of the lease is $8,000, such that the payments are $16,593.



Prepare all of the journal entries for the lessee for 2017 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31

1. The term of the non-cancelable lease is 3 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2017, is $55,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $3,000, none of which is guaranteed. 4. The agreement requires equal annual rental payments of $18,133 to the lessor, beginning on January 1, 2017. 5. The lessee’s incremental borrowing rate is 5%. The lessor’s implicit rate is 4% and is unknown to the lessee. 6. Bramble uses the straight-line depreciation method for all equipment.

Explanation / Answer

Lessee Books . 1 Jan 1, 2017 Lease rent 18133 To Bank 18133 same entry need to pass at the end oif each year Lessor Books 1 Jan 1 , 17 Bank Ac dr 18133 To lease rent 18133 31-Dec-17 Dep ac 11000 To Equipment 11000 same entries need to pass in each year Residual entry for equipment sale Bank Dr 8000 To Loss on sale 14000 To Equipment 22000

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