Question

Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2017. 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. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Your answer is correct. Determine the nature of the lease to both Rauch and Donahue. The lease is a/an operating lease to Rauch. The lease is alan operating lease to Donahue. SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Answer 1

Donahue Corporation
Lease Amortization Schedule
Annuity-Due Basis
Date	Annual Lease Payment	Interest on Liability	Reduction of Lease Liability	Lease Liability
01-01-2017				$ 18,214
01-01-2017	$ 4,892		$    4,892	$ 13,322
01-01-2018	$ 4,892	$   666	$    4,226	$   9,096
01-01-2019	$ 4,892	$   455	$    4,437	$   4,659
01-01-2020	$ 4,892	$   233	$    4,659	$         -
Lease Liability =PV(5%,4,-4892,0,1) = $18,214

Date	Account Titles and Explanation	Debit	Credit
01-01-2017	Right to Use Assets	$ 18,214
	Lease Liability		$ 18,214
01-01-2017	Lease Liability	$    4,892
	Cash		$    4,892
12-31-2017	Lease Expense	$   4,892
	Lease Liability		$      666
	Right to Use Assets		$   4,226
01-01-2018	Lease Liability	$    4,892
	Cash		$    4,892
12-31-2018	Lease Expense	$   4,892
	Lease Liability		$      455
	Right to Use Assets		$   4,437