Question

On January 2, 2018, Cullumber Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $172000 each, payable beginning January 2, 2018. Brick Co. agrees to guarantee the $139500 residual value of the asset at the end of the lease term. The expected value of the residual value is $50000. Brick’s incremental borrowing rate is 11%, however it knows that Cullumber’s implicit interest rate is 9%. What journal entry would Brick Co. make at January 1, 2019 to record the second lease payment? PV Annuity Due PV Ordinary Annuity PV Single Sum 9%, 5 periods 4.23972 3.88965 0.64993 11%, 5 periods 4.10245 3.69590 0.59345

Answer 1

Particulars	Amount	Present value factor @9%	Amount
equal installments	172000	4.23972	$        729,232
Residual value	89500	0.64993	$          58,169
Total			$        787,401
Lease liability	$          787,401
Less:installment	$       (172,000)
	$          615,401
Interest @ 9%	$          (55,386)
	$          560,015
Entry:
Accounts		debit	credit
Lease Liability		$                                  116,614
Interest expense		$                                     55,386
cash			$        172,000