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Q21-8P_d.

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Intermediate Accounting (Kieso)
Found in: Page 1247

Short Answer

Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $137,899 (including the executory costs of $6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at $6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at $550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.

Instructions

(d) Prepare the journal entry to record the interest expense for the year 2017.

Interest expense = $41,810

See the step by step solution

Step by Step Solution

Step 1: Meaning of Interest expense

Interest expense can be referred to as the entire interest amount that accrues from any borrowed funds such as loans or credits. Too much interest expense can cut into a company's profits.

Step 2: Preparing journal entries

Date

Particular

Debit ($)

Credit ($)

Interest Expense

41,810

Interest Payable

41,810

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