Bonita Corporation enters into a 5-year lease of equipment on December 31, 2016,
ID: 2405012 • Letter: B
Question
Bonita Corporation enters into a 5-year lease of equipment on December 31, 2016, which requires 5 annual payments of $37,600 each, beginning December 31, 2016. In addition, Bonita guarantees the lessor a residual value of $18,900 at the end of the lease. However, Bonita believes it is probable that the expected residual value at the end of the lease term will be $8,900. The equipment has a useful life of 5 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $130,000.
Prepare Lost Ark’s 2016 and 2017 journal entries, assuming the implicit rate of the lease is 9% and this is known to Bonita.
Explanation / Answer
Computation of present value of minimum lease payments: PV of Annual payments : $37600 x 4.2397* = $159413 PV of guaranteed residual value: $18900 x 0.6499** = $12283 --------------------------- $171696 *Present value of an annuity due at 9 % for 5 periods. **Present value of $ 1 at 9 % at 5 periods. Prepare the journal entries Jensen would make in 2016 and 2017 related to the lease arrangement. 31/12/16 Debit Leased equipment ………………………………………$171696 Credit Lease liability……………………………………………………………….. $171696 31/12/16 Debit Lease Liability……………………………………………………… $37600 Credit Cash ……………………………………………………………………………… $ 37600 31/12/17 Debit Depreciation Expense …………………………………………..$ 30559 Credit Accumulated Depreciation Capital Leases( $171696 - $18900)/5 $30559 12/31/17 Debit Interest Expenses ($171696-$37600)*9%…………… $ 12069 Debit Lease Liability………………………………………………………$25531 Credit Cash………………………………………... ……………………….. $ 37600