Question

On January 1, 2018, Wetick Optometrists leased diagnostic equipment from Southern Corp. which had purchased the equipment at a cost of $2,296,647. The lease agreement specifies six annual payments of $460,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2022. The six-year lease term ending December 31, 2023 (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 $460,000, 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 8%. (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 and Southern 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, 2018.

Answer 1

Answer 1.

Journal entry for Wetick and Southern to record the lease at its beginning:

No.	Date	General Journal	Debit	Credit
1	January 01, 2018	Right ­-of­ -use asset	2,296,647
		Lease payable		2,296,647
		(To record the right of use asset)

	January 01, 2018	Lease payable	460,000
		Cash		460,000
		( To record the payment of lease)

Answer to Part 2

Journal entries related to the lease for Wetick at December 31, 2018, assuming the CPI is 126 at that time

No.	date	general journal	debit	credit
1.	December 31 2018	lease expense [(460000 *126/120) - 460000]	23000
		Interest expense (2,296,647- 460000)* 8%	146,932
		Lease payable (balancing figure)	313,068
		Cash (460000*126/120)		483,000
		(to record lease and interest payments for Wetick optometrists)
2.	December 31 2018	Amortization expense (2,296,647 / 6)	382,775
		Right of use asset		382,775
		(to record the amortization for right of use asset)