Chapter 15, Problem 15.20E

Variable lease payments

• LO15–2, LO15–6

On January 1, 2018, Wetick Optometrists leased diagnostic equipment from Southern Corp., which had purchased the equipment at a cost of $1,437,237. The lease agreement specifies six annual payments of $300,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2022. The six-year lease term ending December 31, 2023 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index for the year just ended. Thus, the first payment will be $300,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 120. Southern routinely acquires diagnostic equipment for lease to other firms. The interest rate in these financing arrangements is 10%.

Required:

1. Prepare the appropriate journal entries for Wetick and Southern to record the lease at its beginning.

2. Assuming the CPI is 124 at that time, prepare the appropriate journal entries related to the lease for Wetick at December 31, 2018,.