On January 1, 2020, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage's incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 5 years and no residual value. Instructions: (a) Prepare the journal entry or entries that Cage should record on January 1, 2020. (Show two separate entries. One for recording the leased asset and one to record the initial payment). (b) Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2020. Include an amortization schedule. (c) Prepare the journal entry to record the lease payment of January 1, 2021, assuming reversing entries are not made. (The assumption referenced in this question means that there was no initial accrual of the interest expense with a corresponding credit to interest payable. Therefore, there would be no reversing entry made at the time of payment (i.e. no debit to interest payable to reverse the accrual). So what accounts would be affected when this journal entry is made assuming these facts?) (d) What amounts will appear on the lessee's December 31, 2020 balance sheet relative to the lease contract? Note about journal entry format: Enter debits first Points may be deducted for incorrect account names. Display whole numbers for journal entries (a) Debit Credit 550,000 Right of Use Asset Lease Liability 550,00 (To record the leased asset.) Lease Liability 120,987 Cash 120,98 Jan.1 Jan. 1
On January 1, 2020, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage's incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 5 years and no residual value. Instructions: (a) Prepare the journal entry or entries that Cage should record on January 1, 2020. (Show two separate entries. One for recording the leased asset and one to record the initial payment). (b) Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2020. Include an amortization schedule. (c) Prepare the journal entry to record the lease payment of January 1, 2021, assuming reversing entries are not made. (The assumption referenced in this question means that there was no initial accrual of the interest expense with a corresponding credit to interest payable. Therefore, there would be no reversing entry made at the time of payment (i.e. no debit to interest payable to reverse the accrual). So what accounts would be affected when this journal entry is made assuming these facts?) (d) What amounts will appear on the lessee's December 31, 2020 balance sheet relative to the lease contract? Note about journal entry format: Enter debits first Points may be deducted for incorrect account names. Display whole numbers for journal entries (a) Debit Credit 550,000 Right of Use Asset Lease Liability 550,00 (To record the leased asset.) Lease Liability 120,987 Cash 120,98 Jan.1 Jan. 1
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Leases
On January 1, 2020, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of
$120,987 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at
$550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on
an effective-interest basis. Cage's incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which
is known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated
useful life of 5 years and no residual value.
Instructions:
(a) Prepare the journal entry or entries that Cage should record on January 1, 2020. (Show two separate entries.
One for recording the leased asset and one to record the initial payment).
(b) Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2020.
Include an amortization schedule.
(c) Prepare the journal entry to record the lease payment of January 1, 2021, assuming reversing entries are not
made. (The assumption referenced in this question means that there was no initial accrual of the interest expense
with a corresponding credit to interest payable. Therefore, there would be no reversing entry made at the time of
payment (i.e. no debit to interest payable to reverse the accrual). So what accounts would be affected when this
journal entry is made assuming these facts?)
(d) What amounts will appear on the lessee's December 31, 2020 balance sheet relative to the lease contract?
Note about journal entry format:
Enter debits first
Points may be deducted for incorrect account names.
Display whole numbers for journal entries
(a)
Credit
Debit
550,000
Right of Use Asset
Lease Liability
550,000
(To record the leased asset.)
Lease Liability
120,987
Cash
120,987
(To record initial payment. )
Jan. 1
Jan. 1
Use the present value tables in Chapter 6
(make sure to use the correct table!)
Use the full present value factor (with all
decimals) in your calculations
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