Heyward Company entered into a six-year lease for a printing press on January 1,
ID: 2575703 • Letter: H
Question
Heyward Company entered into a six-year lease for a printing press on January 1, 2017. The lease requires Heyward to make equal payments of $75,000 at the end of each of the six years of the lease. Heyward 's incremental borrowing rate is 6 percent. Heyward uses straight-line depreciation and zero estimated salvage value for its office equipment. Heyward’s fiscal year ends December 31.
Required:
Assuming that the lease is an operating lease, give the journal entries that Heyward Company would make during fiscal 2017 to account for the leased printing press. Consider both the inception date of the lease and the date that the lease payment occurs.
Date of lease signing:
December 31:
Repeat (a), assuming that the lease is a capital lease.
Date of lease signing:
December 31:
Problem Two – Operating vs. Capital leases (continued):
c.
Determine the total expense over the six years of the lease, assuming it is an operating lease.
Compute the total expense over the six years of the lease, assuming it is a capital lease. Show separately the interest and depreciation components of the expense.
Explanation / Answer
Heyward Company Assumption 1 It's an Operating Lease Here, the lease Payment is simply recognized as expense in the Books of lessee i.e Heyward Company Date/S. N. Accounts Title & Explanation Debit Credit Amount in $ Amount in $ December 31, 2017 Lease Rental 75000 Cash 75000 To record the Lease rental expense for the year Total Expenses over six years of lease, assuming it is operating lease is =75000*6 = 450000 Assumption 2 It's an Capital Lease We need to prepare Lease amortization schedule to find out the fair Value and Interest component of lease Year Annual Lease Payments PVIF@6% Present Value of Lease Interest expense Depreciation expense 0 1 1 75000 0.943396 70754.72 4245.283 61466.55 2 75000 0.889996 66749.73 8250.267 61466.55 3 75000 0.839619 62971.45 12028.55 61466.55 4 75000 0.792094 59407.02 15592.98 61466.55 5 75000 0.747258 56044.36 18955.64 61466.55 6 75000 0.704961 52872.04 22127.96 61466.55 450000 368799.3 81200.68 368799.32 Total Interest expense 81200.68 Total Depreciation expense 368799.32 Total expense over six Years 450000 Date/S. N. Accounts Title & Explanation Debit Credit Amount in $ Amount in $ December 31, 2016 or January 1, 2017 Leased Asset 368799.32 Lease Liability 368799.32 To record the Lease initially December 31, 2017 Lease Rental 75000 Cash 75000 To record the annual Lease payment December 31, 2017 Lease Liability 70754.72 Interest/Finance charges 4245.28 Lease Rental 75000 To record the bifurication of Lease rental December 31, 2017 Depreciation or accumulated depreication 61466.55 Leased asset 61466.55 To record the annual depreciation on Leased asset