Question

On January 1, 2021, Wetick Optometrists leased diagnostic equipment from Southern Corp., which had purchased the equipment at a cost of $2,256,342. The lease agreement specifies six annual payments of $490,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2025. The six-year lease term ending December 31, 2026 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index for the year just ended. Thus, the first payment will be $490,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 120. Southern routinely acquires diagnostic equipment for lease to other firms. The interest rate in these financing arrangements is 12%. (FV of $1, PV of $1, FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare the appropriate journal entries for Wetick to record the lease at its beginning. 2. Assuming the CPI is 126 at that time, prepare the appropriate journal entries related to the lease for Wetick at December 31, 2021.

Answer 1

1 C Debit(S) 2256342.2 Credit(S) A В. Date Particulars 1-Jan-21 Right of use assets Lease Payable (To record the Right of use assets) 2 2256342.2 5 6 4900001 7 1-Jan-21 Lease Payable Cash (To record the lease payment) 490000 8 9 10 Lease expense Interest expense Lease payable (Difference) Cash (New Payment) (To record the lease payment) 245001 211961 278039 514500 376057 Amortization expense Right of use assets |(To record the amortization expense) 376057

Credit($) A В. 1 Date Particulars 2 44197 Right of use assets 3 Lease Payable |(To record the Right of use assets) Debit(S) =490000*4.60478 =490000*4.60478 6 490000 44197 Lease Payable Cash (To record the lease payment) 490000 10 11 Lease expense Interest expense Lease payable (Difference) Cash (New Payment) |(To record the lease payment) =((490000*126/120)-490000) =((2256342-490000) *12%) =D13-C10-C11 1=(490000*126/120) 12 13 14 15 16 17 18 =225634276 Amortization expense Right of use assets |(To record the amortization expense) 376057 19