Question

On October 1, 2018, Sonoma Company leased equipment from Napa Inc. in lease payable in five equal annual payments of $500,000, beginning Oct 1, 2019. Similar transactions have carried an 11% interest rate. Prepare the journal entry to record the right-of-use asset:

8)  Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

Payment			Cash Payment	Effective Interest			Decrease in balance				Outstanding Balance
												63,282
	1		10,000		0			10,000				53,282
	2		10,000		6,394			3,606				49,676
	3		10,000		5,961			4,039				45,638
	4		10,000		5,477			4,523				41,114
	5		10,000		4,934			5,066				36,048
	6		10,000		4,326			5,674				30,373
	7		10,000		3,645			6,355				24,018
	8		10,000		2,882			7,118				16,901
	9		10,000		?			?				?
	10		10,000		?			?				?

The lease is a finance lease.  Prepare the journal entry the lessee would record for amortization expense on the right-of-use asset.

Answer 1

Right-of-use asset = 500,000*Present value annuity of $1 = 500,000*3.69590

= $1,847,950

Dr Cr

1/1/2018 Right of use Asset $1,847,950

Napa Inc $1,847,950

8)

Amortization expense $6,328.2

Right of use Asset $6,328.2

9		10,000		2,028			7,972				8,929
10		10,000		1,071			8,929			0