E21-2 (L02.4) (Lessee Entries; Finance Lease with Unguaranteed Residual Value) O
ID: 340499 • Letter: E
Question
E21-2 (L02.4) (Lessee Entries; Finance Lease with Unguaranteed Residual Value) On December 31, 2016, Burke Corpora- tion signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting December 31, 2016. The machine has an estimated useful life of 6 years and a $5,000 unguar anteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke's incremental borrowing rate is 5%, and the lessor's implicit rate is unknown. Instructions (a) What type of lease is this? Explain. (b) Compute the present value of the lease payments. (c) Prepare all necessary journal entries for Burke for this lease through December 31, 2017.Explanation / Answer
Answer:
1
Type of lease: Capital Lease
Explanation
This is capital Lease because the lease term cover 75% of the economics life of the assets
5 year is more than 75% of 6 year Life of the assets
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2
Computation of the present value of the lease payment
=Annual Lease payment x PV factor at 5% for 5 year
=8668 x 4.545951
=$39,404
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3
Date
Description
Debit $
Credit $
12/31/2016
Leased equipment
39404
Leased liability
39404
Leased liability
8668
Cash
8668
12/30/2017
depreciation expanses
7881
Accumulated depreciation -
Capital lease
7881
(39404/5)
(To record the depreciation expanses)
Interest expanses
1537
Interest payable
1537
(39404-8668)*5%
(To record the Interest expenses)
12/31/2017
Leased liability
7131
Interest payable
1537
Cash
8668
Date
Description
Debit $
Credit $
12/31/2016
Leased equipment
39404
Leased liability
39404
Leased liability
8668
Cash
8668
12/30/2017
depreciation expanses
7881
Accumulated depreciation -
Capital lease
7881
(39404/5)
(To record the depreciation expanses)
Interest expanses
1537
Interest payable
1537
(39404-8668)*5%
(To record the Interest expenses)
12/31/2017
Leased liability
7131
Interest payable
1537
Cash
8668
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