Shapiro Inc was incorporated in 2010 to operate as a computer software service f

Question

Shapiro Inc was incorporated in 2010 to operate as a computer software service firm with an accounting fiscal year ending 8/31. Shapiro's primary product is a sophisticated online invenotry-control system; its customer paya fixed fee plus a usage charge for using the system.
Shapiro has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of 40,000 for the 144 months of the lease term. The estimated useful life of the computer is 15 years.
Each scheduled monthly rental payment includes $3,000 for full-service maintenance on the computer to be performed by the manufacturer. All rentals are payable on the first day of the month beginning wish 8/1/11, the date the computer was installed and the lease agreement was signed. The lease is noncancelable for its 12-year term, and it is secured only by the manufacturer's chattel lien on the Alpha-3 system.
This lease is to be accounted for a s a capital lease by Shapiro, and it will be depreciated by the straight-linemethod with no expected salvage value. Borrowed funds for this type of transaction would cost Shapiro 12% per yerar (1% per month). Following is a schedule of the present value of $1 for selected periods discounted at 1% per period when payments are made at the beginning of each period.

Period(months) Present value of $1 per Period Discounted at 1% per period
1 1.000
2 1.99
3 2.970
143 76.658
144 76.899

Instructions
Prpare, in general journal form, all entries Shapiro should have made in its accounting records during August 2011 relating to this lease. Give full explanations and show supporting computations for each entry. Remember, 8/31/11, is the end of Shapiro's fiscal accounting period and it will be preparing financial statements on that date. Do not prepare closing entries.

Explanation / Answer

Value of the capital asset= Present value of the 144 beginning -of-the-month- lease payments of $ (40000-3000)=37000 @ 1%p.m.(annuity due payments) ie. ((PMT*((1-(1+r)^-n)/r))*(1+r)) Substituting the above values ((37000*((1-(1+0.01)^-144)/0.01))*(1+0.01)) 2845245.575 or, 37000*76.899 = 2845263 (Using PV Factor as given in Question) Journal Entries by Shapiro(Lessee) For the month of Aug.2011 Date Account Titles Debit Credit 01-Aug-11 Leased Asset- Alpha-3 Computer System 2845263 Lease liability 2845263 (Recognising leased asset and lease liability @ PV of Future Payments) Lease liability 37000 Maintenance Expenses 3000 Cash 40000 (Recording monthly payment for Aug.2011-including interest @1% p.m. maintenance) 31-Aug-11 Depreciation 15807.02 Accumulated Depreciation 15807.02 (1 month Depn.-2845263/15/12) (useful life of 15 yrs. Considered) Interest Expense 370 Interest accrued 370 (interest on 37000 @1% p.m.)

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