Question

On January 1, 2016, Concord Corp. signs a contract to lease manufacturing equipment from Stone Inc. Concord agrees to make lease payments of $47,500 per year. Additional information pertaining to the lease is as follows:

1.	The term of the noncancelable lease is 3 years, with a renewal option at the end of the lease term. Payments are due every January 1, beginning January 1, 2016.
2.	The fair value of the manufacturing equipment on January 1, 2016, is $150,000. The equipment has an economic life of 7 years.
3.	Concord guarantees that the equipment will have a residual value of $15,000 at the end of the lease term.
4.	Concord Corp. depreciates similar assets using the straight line method.
5.	Concord’s incremental borrowing rate is 15% per year; Stone’s implicit interest rate is 10% and known by Concord.
6.	Concord pays $2,500 per year for maintenance of the equipment and $1,000 in property taxes.

Required:

1.	Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Concord.
2.	Calculate the amount of the asset and liability to be reported by Concord at the inception of the lease.
3.	Prepare a table summarizing the lease payments and interest expense.
4.	Prepare journal entries for Concord for the entire lease period. Assume that the equipment has a fair value of $9,500 at the end of the 3-year lease term.

Chart of Accounts

CHART OF ACCOUNTS
Concord Corp.
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Leased Equipment 189 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 252 Capital Lease Obligation 255 Accrued Interest on Capital Lease Obligation 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 514 Maintenance Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 891 Loss on Guaranteed Residual Value 910 Property Tax Expense

Next Level

Examine and evaluate each capitalization criteria and determine what type of lease this is for Concord.

Determine what type of lease this is for Concord.

Criteria	Met
Transfer of ownership at end of lease	No
Bargain purchase option	No
Lease term is 75% or more of economic life	No
Present value of lease payments is 90% or more of fair value	No

Determine what type of lease this is for Concord.

Operating lease

Analysis

Calculate the amount of the asset and liability to be reported by Concord at the inception of the lease. Additional Instruction

Prepare a table summarizing the lease payments and interest expense. Additional Instructions

Concord Corp.

Summary of Lease Payments and Interest Expense

2016 - 2018

1	Date	Annual Lease Payment	Interest at 10% on Unpaid Obligation	Balance of Capital Lease Obligation
2	January 1, 2016 : Before the Initial Payment
3	January 1, 2016
4	December 31, 2016
5	January 1, 2017
6	December 31, 2017
7	January 1, 2018
8	December 31, 2018

General Journal

Prepare journal entries for Concord for the entire lease period for the year 2016. Assume that the equipment has a fair value of $9,500 at the end of the 3-year lease term. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11

Prepare journal entries for Concord for the entire lease period for the year 2017. Assume that the equipment has a fair value of $9,500 at the end of the 3-year lease term. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10

Prepare journal entries for Concord for the entire lease period for the year 2018. Assume that the equipment has a fair value of $9,500 at the end of the 3-year lease term. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

I only need help with Prepare journal entries for Concord for the entire lease period for the year 2017. Assume that the equipment has a fair value of $9,500 at the end of the 3-year lease term, and Prepare journal entries for Concord for the entire lease period for the year 2018. Assume that the equipment has a fair value of $9,500 at the end of the 3-year lease term. Thank You

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
Present value	= Lease payments × PV factor for 3 payments at 10% +
	Guaranteed residual value × PV factor for single sum at 10%
	= ($47,500 × 2.735537) + ($15,000 × 0.751315)
	= $129,938.01 + $11,269.73
	= $141,207.74
Amortization Schedule:
Date	Annual Lease Payment	Interest	Balance
Jan 1 2016			$141,207.74
Jan 1 2016	$                                                                                   47,500.00	$                -	$ 93,707.74
Dec 31 2016		$    9,370.77	$103,078.51
Jan 1 2017	$                                                                                   47,500.00		$ 55,578.51
Dec 31 2017		$    5,557.85	$ 61,136.37
Jan 1 2018	$                                                                                   47,500.00		$ 13,636.37
Dec 31 2018	$                                                                                   15,000.00	$    1,363.64	$            0.00
Journal Entries:
Date	Accounts	Debit	Credit
Year 2016
Jan 1 2016	Lease Equipment	$141,207.74
	Capital Lease Obligation		$141,207.74
	(To record lease)
Jan 1 2016	Capital Lease Obligation	$ 47,500.00
	Cash		$ 47,500.00
	(To record lease payment)
Dec 31 2016	Interest Expense	$    9,370.77
	Accrued Interest on Capital lease		$    9,370.77
	(To record interest expense)
Dec 31 2016	Maintenance Expense	$    2,500.00
	Property Tax Expense	$    1,000.00
	Cash		$    3,500.00
	(To record maint and property tax)
Dec 31 2016	Depreciation Expense-Leased Equipment	$ 42,069.25
	Accumulated Depreciation-Leased Equipment		$ 42,069.25
	(To record dep expense) ($141,207.74-$15,000)/3 Years
Year 2017
Jan 1 2017	Accrued Interest on Capital lease	$    9,370.77
	Capital Lease Obligation	$ 38,129.23
	Cash		$ 47,500.00
	(To record lease payment)
Dec 31 2017	Interest Expense	$    5,557.85
	Accrued Interest on Capital lease		$    5,557.85
	(To record interest expense)
Dec 31 2017	Maintenance Expense	$    2,500.00
	Property Tax Expense	$    1,000.00
	Cash		$    3,500.00
	(To record maint and property tax)
Dec 31 2017	Depreciation Expense-Leased Equipment	$ 42,069.25
	Accumulated Depreciation-Leased Equipment		$ 42,069.25
	(To record dep expense) ($141,207.74-$15,000)/3 Years
Year 2018
Jan 1 2018	Accrued Interest on Capital lease	$    5,557.85
	Capital Lease Obligation	$ 41,942.15
	Cash		$ 47,500.00
	(To record lease payment)
Dec 31 2018	Interest Expense	$    1,363.64
	Accrued Interest on Capital lease		$    1,363.64
	(To record interest expense)
Dec 31 2018	Maintenance Expense	$    2,500.00
	Property Tax Expense	$    1,000.00
	Cash		$    3,500.00
	(To record maint and property tax)
Dec 31 2018	Depreciation Expense-Leased Equipment	$ 42,069.25
	Accumulated Depreciation-Leased Equipment		$ 42,069.25
	(To record dep expense) ($141,207.74-$15,000)/3 Years
Dec 31 2018	Accumulated Depreciation-Leased Equipment	$126,207.74
	Loss on Guranteed Residual Value	$    4,500.00
	Capital Lease Obligation	$ 15,000.00
	Lease equipment		$141,207.74
	Cash		$    4,500.00