Question

Question 6 Ludwick Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $40,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 6%; Ludwick's incremental borrowing rate is 8%. Ludwick is unaware of the rate being used by the lessor. At the end of the lease, Ludwick has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Ludwick uses the straight-line method of depreciation on similar owned equipment. Click here to view factor tables. (a) Your answer is partially correct. Try again. Prepare the journal entries, that Ludwick should record on December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 58,971.) Date Account Titles and Explanation Debit Credit December 31, 2020 TRight-of-Use Asset Lease Liability (To record leased asset and related liability.) Lease Liability Cash (To record the first rental payment.) LINK TO TEXT LINK TO TEXT

Answer 1

date	Amount	Present value factor 8%	present value
31 dec 2020	$ 40000	1	$ 40000
31 dec 2021	$ 40000	0.9259	$ 37036
31 dec 2022	$ 40000	0.8573	$ 34292
31 dec 2023	$ 40000	0.7938	$ 31752
31 dec 2024	$ 40000	0.7350	$ 29400
			$ 172480

Loan amortization schdule	Annual lease payament	interest expenses 8%	reduction of lease liability $	lease liability $
				172480
31 dec 2020	$ 40000		40000	132480
31 dec 2021	$ 40000	10598	29402	103078
31 dec 2022	$ 40000	8246	31754	71324
31 dec 2023	$ 40000	5706	34294	37030
31 dec 2024	$ 40000	2962	37030

Journal Entries
dec 31 2020	Right to use Asset	$ 172480
	Lease Liability		$ 172480
	(To record Liability)
dec 31 , 2020	Lease Liability	$ 40000
	Cash		$ 40000
	(To record lease payments)