Question

Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2020. The lease agreement called for annual rental payments of $4,892 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000, and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Rauch set the lease payments with the intent of earning a 5% return, and Donahue is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

Prepare the lease amortization schedule(s) for Donahue for all 4 years of the lease. (Round answers to 0 decimal places, e.g. 5,275.)

DONAHUE CORPORATION Lease Amortization Schedule Annuity-Due Basis Reduction of Interest on Liability Lease Liability Annual Payment Lease Liability 4892 4892 4 892 1/1/22 1 1/1/237 4892

Prepare the journal entries for Donahue for 2020 and 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Suppose Donahue incurs initial direct costs of $750 related to the lease. Prepare the journal entries for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

I need help calculating the incorrect answers that are highlighted in red. Everything that is highlighted in green is correct.

Answer 1

Present value of periodic rental payments = annual rental payment * PV of annuity due(4, 5%) $4,892 * 3.72325 = $18,214

DONAHUE CORPORATION Lease Amortization Schedule
Date	Annual payment	Interest on liability	Reduction of lease liability	Lease liability
1/1/20				18214
1/1/20	4892		4892	13322
1/1/21	4892	666	4266	9096
1/1/22	4892	455	4437	4659
1/1/23	4892	233	4659

Interest on liability = previous lease liability * 5%

Reduction of lease liability = annual payment – interest on liability

Lease liability = previous lease liability - Reduction of lease liability

Lease expense Schedule
Date	Lease Expense (straight-Line)	Interest on Lease liability	Amortization of ROU Asset	Carrying value of ROU Asset
1/1/20				18214
12/31/20	4892	666	4266	13988
12/31/21	4892	455	4437	9551
12/31/22	4892	233	4659	4892
12/31/23	4892		4659

Interest on liability = previous Carrying value of ROU Asset * 5%

Amortization of ROU Asset = Lease Expense – interest on lease liability

Carrying value of ROU Asset = previous Carrying value of ROU Asset - Amortization of ROU Asset

Date	Account titles and explanation	Debit	Credit
1/1/20	Right-of-use asset	18214
	Lease liability		18214
	(to record the lease)
1/1/20	Lease liability	4892
	Cash		4892
	(to record lease payment)
12/31/20	Lease expense	4892
	Lease liability		666
	Right-of-use asset		4266
1/1/21	Lease liability	4892
	Cash		4892
12/31/21	Lease expense	4892
	Lease liability		455
	Right-of-use asset		4437
			4266

Date	Account titles and explanation	Debit	Credit
1/1/20	Right-of-use asset	18964
	Lease liability		18214
	Cash		750
	(to record the lease)
1/1/20	Lease liability	4892
	Cash		4892
	(to record lease payment)
12/31/20	Lease expense	5080
	Lease liability		666
	Right-of-use asset		4414