Question

A capital lease agreement for equipment requires Granger Transport Ltd. to make 10 annual payments of $40,000, with the first payment due on January 2, 2014, the date of the inception of the lease. The present value of the nine future lease payments at 10 percent is $230,360. Required 1. Calculate the present value of the lease at 5 percent if your instructor has taught present value. 2. Journalize the following lessee transactions: 2014 Jan. 2 Beginning of lease term and first annual payment. Dec. 31 Amortization of equipment (10 percent). 31 Interest expense on lease liability. 2015 Jan. 2 Second annual lease payment. 3. Assume now that this is an operating lease. Journalize the January 2, 2014, lease payment

Answer 1

Requirement 1:

First lease payment	$40,000
Present value of nine future lease payments	$230,360
Present value of the lease	$270,360

Requirement 2:

Date	Account title and explanation	Debit	Credit
Jan 2, 2014	Right-of-Use asset	$270,360
	Lease liability		$270,360
	[To record operating lease]
Jan 2, 2014	Lease liability	$40,000
	Cash		$40,000
	[To record first lease payment]
Dec. 31, 2014	Lease expense [$230,360 x 5%]	$11,518
	Lease Liability		$11,518
	[To record interest expense]
Dec. 31, 2014	Lease expense	$27,036
	Right-of-use [270,360 x 10%]		$27,036
	[To record amortization of equipment]
Jan 2, 2015	Lease liability [11,518+27,036]	$38,554
	Cash		$38,554
	[To record second lease payment]