On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasi
ID: 2552722 • Letter: O
Question
On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $412,184 and has an expected economic life of five years. Aqua expects the residual value at December 31, 2018, to be $50,000. Negotiations led to Maywood guaranteeing a $70,000 residual value.
Equal payments under the lease are $100,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Maywood is aware that Aqua used a 5% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1. & 2. Prepare the appropriate entries for Maywood on January 1, 2018 and December 31, 2018, related to the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Explanation / Answer
1 & 2) Lease liability to be recognized in the books of Maywood = PV of annual lease payments+PV of residual value
= [$100,000*PVAF(5%, 4 yrs)]+[$70,000*PVF(5%, 4 yrs)
= ($100,000*3.5459505)+($70,000*0.8227025)
= $354,595+$57,589 = $412,184
Journal Entries in the books of Maywood (Amounts in $)
Date Account Titles and Explanations Debit Credit Jan 1, 2018 Right of Use Asset 412,184 Lease Liability 412,184 (To record the lease liability) Dec 31, 2018 Interest Expense ($412,184*5%) 20,609 Lease Liability ($100,000 - $20,609) 79,391 Cash 100,000 (To record the annual lease payment) Dec 31, 2018 Depreciation Expense ($412,184/4 yrs) 103,046 Right of Use Asset 103,046 (To record the depreciation expense)