Question

Exercise 21-11 Laura Leasing Company signs an agreement on January 1, 2017, to lease equipment to Novak Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 5 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 $74,100. 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 $6,900, none of which is guaranteed. 4. Novak Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $850 to Rocky Mountain Insurance Company for insurance and (2) $1,750 to Laclede County for property taxes. 5. The agreement requires equal annual rental payments of $16,742.92 to the lessor, beginning on January 1, 2017. 6. The lessee's incremental borrowing rate is 12%. The lessor's implicit rate is 10% and is known to the lessee. 7. Novak Company uses the straight-line depreciation method for all equipment. 8. Novak uses reversing entries when appropriate.

Answer 1

Lease payment 16742.97 Annuity factor @ 10% , 5 years- 4.16987 69,815.93 NOVAK COMPANY (LESSEE) Lease amortization schedule Annual lease Interest on reduction of Lease lease liability liability Date liability PV Factor@ 10% Payment A B C Ex 10% D B C E E-D Year 1 1.00000 $69,815.93 Year 2 $ 16,742.97 $53,072.96 Year 3 01/01/2017 0.90909 01/01/2017 $ 01/01/2018 $ 01/01/2019 $ 01/01/2020 $ 01/01/2021 S 16,742.97 $ 16,742.97 $ 16,742.97 $ 0.82645 5,307.30 $ 11,435.67 $41,637.29 Year 4 4,163.73 12,579.24 $29,058.05 Year 5 2,905.80 $13,837.17 $15,220.88 1,522.09 $15,220.88 | $ 0.75131 0.68301 16,742.97 4.16987 16,742.97 $ 83,714.85 $ 13,898.92 $ 69,815.93 Value of asset $ 69,815.93 5 years $ Useful life Depreciation per year 13,963.19

Journal entry - You can round the amount if required Account title and explanation Debit Credit Date 01/01/2017 Leased equipment under capital lease lease liability (To record lease of asset) $ 69,815.93 $ 69,815.93 01/01/2017 lease liability $ 16,742.97 $ 16,742.97 Cash (To record lease payment) 31/12/2017 Insurance expense $ 850 cash 850.00 (To record insurance payment) $ 1,750.00 Property tax expense $ 1,750.00 cash (To record property tax payment) 31/12/2017 Interest expense 5,307.30 interest payable $ 5,307.30 (to record lease payment) $ 13,963.19 Depreciation expense (69,815.93/5) Accumulated depreciation Capital lease $ 13,963.19 (to record depreciation)

01/01/2018 Interest payable $ 5,307.30 $ 5,307.30 Interest expense (To reverse interest) $ 5,307.30 Interest expense Lease liability $11,435.67 $ 16,742.97 Cash (to record lease payment) 31/12/2018 Insurance expense 850.00 cash 850.00 (To record insurance payment) $ 1,750.00 Property tax expense $ 1,750.00 cash (To record property tax payment) 31/12/2018 Interest expense $ 4,163.73 $ 4,163.73 interest payable (to record lease payment) $ 13,963.19 Depreciation expense (69,815.93/5) Accumulated depreciation Capital lease (to record depreciation) $ 13,963.19

Please comment if you have any doubt

Please give thumps up if you are satisfied with the answer