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Q21-8P_e.

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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

(e) Prepare the journal entry to record the lease payment of January 1, 2018, assuming reversing entries are not made.

Annual lease payments are $131,899

See the step by step solution

Step by Step Solution

Step 1: Meaning of lease payments.

Lease payment refers to a monthly rental payment made by one party to another for the use of property or equipment for a specific period of time.

Step 2: Preparing journal entries

Date

Particular

Debit ($)

Credit ($)

Executory Costs

6,000

Interest Payable

41,810

Lease Liability

90,089

Cash

137,899

Step 3: Preparing lease amortization schedule.

CAGE COMPANY (Lessee)

Lease Amortization Schedule

Date

Annual Lease Payments

Interest (10%)

on Liability

Reduction of Lease Liability

Lease Liability

1/1/17

$550,000

1/1/17

$131,899

$ 0

$131,899

418,101

1/1/18

131,899

41,810

90,089

328,012

1/1/19

131,899

32,801

99,098

228,914

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