Question

On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a three-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $416,676 and has an expected economic life of four years. Aqua expects the residual value at December 31, 2024, to be $54,000. Negotiations led to Maywood guaranteeing a $76,000 residual value.

Equal payments under the lease are $108,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 6% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. & 2. Prepare the appropriate entries for Maywood on January 1, 2021 and December 31, 2021, related to the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to the nearest whole dollar.)

Answer 1

This lease is consider as finance lease. Because of the lease period is equal to 75% (3 years lease / 4 expected life).
Year	PV factor @6%
1	0.94340
2	0.89000
3	0.83962
Total PV annuity due (Total of 0 to 4)	2.67301
Present value of lease payments (108000*2.67301)	$     288,685
Present value of probable residual payment due (76000-54000= 22000) (22000*0.83962)	$       18,472
Total present value	$     307,157

Lease amortization table
Date	Beginning balance of lease payable	Lease payment	Interest expense (beginning balance of lease payable *11% )	Reduction in lease payable (lease payment - interest expense)	Ending balance of lease payable (beginning balance of lease payable - reduction in lease payable)
Jan 1, 2021					$                              307,157
Dec 31, 2021	$          307,157	$        108,000	$                   18,429	$               89,571	$                              217,586
Dec 31, 2022	$          217,586	$        108,000	$                   13,055	$               94,945	$                              122,642
Dec 31, 2023	$          122,642	$        130,000	$                     7,358	$            122,642	$                                           0
Last payments includes = 108000 + 22000 = 130000

Lessee (Maywood )
Journal entries
Date	General Journal	Debit	Credit
Jan 1, 2021	Right of use asset	$        307,157
	Lease liability		$          307,157
	(To record the lease)
Dec 31, 2021	Lease liability	$          89,571
	Interest expense	$          18,429
	Cash		$          108,000
	(To record lease payment)
Dec 31, 2021	Amortization Expense	$        102,386
	Right of use Asset		$          102,386
	(To record depreciation) (307157/3)