Question

Rogers Company signs a five-year capital lease with Packer Company for office equipment. The annual year-end lease payment is \(10,000, and the interest rate is 8%.

Required

1. Compute the present value of Rogers’s five-year lease payments.
2. Prepare the journal entry to record Rogers’s capital lease at its inception.
3. Complete a lease payment schedule for the five years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is \)39,927. (Hint: To find 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.)

Period ending date	Beginning balance of lease liability	Interest on lease liability	Reduction on lease liability	Cash lease payment	Ending balance of lease liability

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 five-year life for the office equipment.

Short answer

(1) Present value equals $39,927..

(2) Leased asset will be debited and leased liability will be credited by $10,000, respectively.

(3) Schedule is prepared in step 4.

(4) Depreciation expense- leased asset is debited and accumulated Depreciation expense- leased asset is credited by $2,000, respectively.

Step-by-step solution

Explanation on Lease

Lease contract provides the lessee an exclusive right to use the asset, in the lieu of fixed rental to the lessor.

(1) Present value of Rogers’s five-year lease payments

Lease amount =$10,000

Interest rate= 8%

Period= 5 year

Table value= 3.9927

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{=}\mathbf{L}\mathbf{e}\mathbf{a}\mathbf{s}\mathbf{e}\mathbf{p}\mathbf{a}\mathbf{y}\mathbf{m}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{\times }\mathbf{\text{Tablefactor}}\\ \mathbf{=}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{3}\mathbf{.9927}\\ \mathbf{=}\mathbf{\$}\mathbf{39}\mathbf{,}\mathbf{927}\end{array}$

(2) Journal entry to record capital lease

Leased asset	$10,000
Leased liability		$10,000
Record lease asset and liability

(3) Lease payment schedule        

Payments
	A	B	C	D	E
Year	Beginning balance of lease liability	Interest on lease liability 8% of (A)	Reduction on lease liability (D)-(B)	Cash lease payment (B)+(C)	Ending balance of lease liability (A)-(C)
1	39,927	3,194	6,806	10,000	33,121
2	33,121	2,650	7,350	10,000	25,771
3	25,771	2,062	7,938	10,000	17,833
4	17,833	1,426	8,574	10,000	9,259
5	9,259	741	9,259	10,000	0

(4) Journal entry to record depreciation

Depreciation expense- leased asset	$2,000
Accumulated depreciation- leased asset		$2,000
Record depreciation

Calculation of depreciation expense:

$\begin{array}{c}\mathbf{D}\mathbf{e}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{i}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{=}\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{S}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{0}}{\mathbf{5}}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\end{array}$