Chapter 14, Problem 11BPSB

Problem 14-11E^C

Capital lease accounting

C3

Braun Company signs a ?ve-year capital lease with Verdi Company for office equipment. The annual year-end lease payment is $20,000, and the interest rate is 10%.

Required

1. Compute the present value of Braun’s lease payments.

2. Prepare the journal entry to record Braun's capital lease at its inception.

3. Complete a lease payment schedule for the ?ve years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is $75,816. (Hint: To ?nd the amount allocated to interest in year 1, multiply the interest rate by the beginning-of year lease liability. The amount of the annual lease payment not allocated to interest is allocated to principal. Reduce the lease liability by the amount allocated to principal to update the lease liability at each year-end.)

4. Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a ?ve-year life for the of?ce equipment.

Check (1) $75,816

(3) Year 3 ending balance $34,712

Period Ending Date

Beginning Balance of Lease Liability

Interest on Lease Liability

Reduction of Lease Liability

Cash Lease Payment

Ending Balance of Lease Liability