Question

Ludwick steel company as lessee, singed a lease agreement for equipment for 5 years, beginning december 31,2017. Annual rental payments of 40,000 are to be made at the beginning of each lease year,(december31). The interest rate used by the lessor in setting the paymment scheduled at 6%. Ladwick incremental borrowing rate is 8%. Ladwick umaware of the rate being used be the lessor. at the end of the lease, Ladeick has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The quipment has an estimated useful life of 7 years, with no salvage value. Ladwick usage straight line method of depreciation on similar owned equipment.

instruction:

(a) prepare the journal entry or entries , with explanation , that Ladwick should record on december 31,2017.

(b) prepare the journal entry or entries , with explanation , that Ladwick should record on december 31,2018.(prepare the lease amortization schedule for all 5 payments).

(c) prepare the journal entry or entries , with explanation , that Ladwick should record on december 31,2019.

(d) What amounts would appear on Ladwick's December31,2019 balance sheet related to the lease agreement.

Answer 1

Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2017. Annual rental payments of $40,000 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance costs are the obligation of the lessee

for Sig ned a lease agreement slee lesee company as December 31, 2017 cauiment for 5ycars bes9ing Ars the December 2017 there fove beg ins tease On 31S anucoy 2o17 no saurnal entry on 1st there be Can Qymert ca become due on 31 St Also, the tease of each Yaov. So ideally , there Should be Oecember coe can YeCd no sourna entry on 1st January However Decem be of the 31S+ Payment leaSe n Janucay as aurent are one and and Yaar an 1 of net Year the Same hing Paxt a as Sollocay The Jourral entries oc Date Account titles Lease ipmert under opital Cease 40,000 IPA CIoyars40,00 Debtt Yadit December 166 794 21,2017 Case (rdbilty 6G794 Oerember lrabi ty Lease 40,000 Zol7 anuoy cash H01000

Part as folloas The ournal entries aYe Oate Derember Accoont Titles Deprecadon ExPense (66179 Rebi CYeit 3, 2018 23828 ACCumulated ocereciaton 23 828 De Cember 31,9o1 nteves expense 66 784-0.co10 12G79 Lease Ligbility (401000-12169 an32) cosh 40000 he lease amorti2ation Schedue is 9iven as below Steel Company Amarti2ation Schedule Roducton of Lense obligatioo abilty lease Anrual Cease Interest Amount lease Oate Payment 166794 Detember 31 201구 126.794 Oecember 3 40,000 40,000 2017 9qu73 2732 12/679 C124794 December 3) 40/0 00 fi26794- c4orcaD-12679) 17321) 2o18 69421 30. 053 Oecember 3l 9,9H3 0/aao eq473 (99,473 101) (40,000 -,q47 2o19 3005 3) 36.363 G,942 33 058 Oe cembe 21 40000 (69,42 1o) (40.0c0 -6A4) 21 33 05 8) 오020 36.3 63 Oc comber 31 36.36 40, 000 (rounded oft) 202 o

Part as follous: the Jour nal entries Oate Debit crad Accoun lles. Deceaber Deprec tation EPonse (166.794/7) 31,20l9 23828 Accumulated Depreciation 23818 December 31,201q Interes Exense rom Amarination Toble 9LA Danuany 2020 Lease liability rom Aodhatica Tabe 3o/053 Cash 40000 Part (d beloc the balante shec is given as Steel company sheel alane Oecember 31 2019 Property Pant and Eaulpmend E2uipment under cureal labilities leased cueital Leases 166 7924 (eaSe liabiltty 33.058 Accumulated Deprectation 7,656 tess 119,138 Cong term Lease tra bility 36361