Accounting for Leases On July 1, 2014, Stokes Company leased a warehouse buildin
ID: 2450262 • Letter: A
Question
Accounting for Leases
On July 1, 2014, Stokes Company leased a warehouse building under a 20-year lease agreement. The lease requires quarterly lease payments of $5,500. The first lease payment is due on September 30, 2014. The lease was reported as a capital lease using a 4% annual interest rate.
Required
a. Prepare the journal entry to record the initial signing of the lease on July 1, 2014.
(Use a financial calculator or Excel to compute. Round answer to the nearest whole number.)
b. Prepare the journal entries that would be necessary on September 30 and December 31, 2014.
(Use rounded answer from above for subsequent calculations. Round your answers to the nearest dollar.)
d. Prepare a financial statement effects template to show the effects of the entries from parts a and b on the balance sheet and income statement.
Explanation / Answer
Answer:
Annual Interest Rate = 4%, Quarterly Interest Rate = 4/4 =1%, No. of quarter(period)= 20*4 = 80 periods
Present Value of Capital Lease = Quarterly Payments * {1-(1+interest rate )^-no. of periods} / interest rate
= 5,500 * {1- (1+.01)^-80} / .01
= $301,885
Answer a & b
Answer d
Calculation of interest Date Principal Outstanding Interest @ 1% Total Less: Installment Principal Outstanding 30-09-14 301,885 3,019 304,904 5,500 299,404 31-12-14 299,404 2,994 302,398 5,500 296,898