Crane Steel Company as lessee signed a lease agreement for equipment for 5 years
ID: 2586364 • Letter: C
Question
Crane Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2017. Annual rental payments of $49,000 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance costs are the obligation of the lessee. The interest rate used by the lessor in setting the payment schedule is 9%; Crane’s incremental borrowing rate is 9%. Crane is unaware of the rate being used by the lessor. At the end of the lease, Crane has the option to buy the equipment for $1, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Crane uses the straight-line method of depreciation on similar owned equipment.
Prepare the journal entries, that should be recorded on December 31, 2017, by Crane.
Prepare the journal entries, that should be recorded on December 31, 2018, by Crane.
Prepare the journal entries, that should be recorded on December 31, 2019, by Crane.
What amounts would appear on Crane’s December 31, 2019, balance sheet relative to the lease arrangement?
Explanation / Answer
Present Value of minimum lease payment = 49000 + 49000*Present value annuity factor(9%,4)
= 49000 + 49000*3.2397 = 49000 + 158745.30 = 207745.30
Journal Entries recorded on December 31, 2017, by Crane:
Leased Asset Dr 207745.30
Leased liability Cr 207745.30
Journal Entries recorded on December 31, 2018, by Crane for payment of lease rent:
Interest Expense Dr 14287 (158745.30*9%)
Leased liability Dr 34713
Cash Cr 49000
Journal Entries recorded on December 31, 2018, by Crane for recording of depreciation:
Depreciation Expense Dr 29678 (207745.30/7)
Leased Asset Cr 29678
Journal Entries recorded on December 31, 2019, by Crane:
Interest Expense Dr 11163 (158745.30-34713)*9%
Leased liability Dr 37837
Cash Cr 49000
Journal Entries recorded on December 31, 2019, by Crane for recording of depreciation:
Depreciation Expense Dr 29678 (207745.30/7)
Leased Asset Cr 29678
Amount appear on balancesheet with respect to lease arrangement:
Leased Asset = 207745.30 - (29678*2) = 207745.30 - 59356 = 148389.30
Leased liability = 207745.30 - 49000 - 34713 - 37837 = 86195.30