Question

Buffalo Leasing Company agrees to lease equipment to Carla Corporation on January 1, 2017. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2017, is $713,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $103,000. Carla estimates that the expected residual value at the end of the lease term will be 103,000. Carla amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017. 5. The collectibility of the lease payments is probable. 6. Buffalo desires a 11% rate of return on its investments. Carla's incremental borrowing rate is 12%, and the lessor's implicit rate is unknown. (Assume the accounting period ends on December 31.)

Answer 1

		Lease PMT	Interest	Lease Reduction	Lease Liability
	1	$126,830			$521,450
	2	$126,830	$62,574	$64,256	$457,194
	3	$126,830	$54,863	$71,967	$385,227
	4	$126,830	$46,227	$80,603	$304,625
	5	$126,830	$36,555	$90,275	$214,350
	6	$126,830	$25,722	$101,108	$113,241
	7	$126,830	$13,589	$113,241	$0
Date	Accounts Titles and Explanation	Debit	Credit
12/31/17	Amortization Expense	$64,256
	Right-of-use Asset		$64,256
	(To record amortization)
12/31/18	Lease Liability	$126,830
	Cash		$126,830
	(To record lease payment)
	Amortization Expense	$71,967
	Right-of-use Asset		$71,967
	(To record amortization)
	Interest Expenses	$54,863
	Lease Liability		$54,863
	(To record interest)