Question

Rick Kleckner Corporation recorded a capital lease at \(300,000 on January 1, 2017. The interest rate is 12%. Kleckner Corporation made the first lease payment of \)53,920 on January 1, 2017. The lease requires eight annual payments. The equipment has a useful life of 8 years with no salvage value. Prepare Kleckner Corporation’s December 31, 2017, adjusting entries.

Short answer

Interest Payable is $29,530

Accumulated depreciation is $37,500

Step-by-step solution

Meaning of Capital Lease

A capital lease may be a renting course of action in which the lessor commits to exchange proprietorship rights to the tenant when the lease time is completed. Capital or fund leases are frequently long-term and non-cancelable.

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
	Interest Expense	29,530
	Interest Payable		29,530
	Depreciation Expense	37,500
	Accumulated Depreciation Capital Leases		37,500

Working Notes:

$\begin{array}{rcl}\mathrm{Interest}\mathrm{payable}& =& \left(\mathrm{Capital}\mathrm{lease}-\mathrm{Lease}\mathrm{payments}\right)\times \mathrm{interest}\mathrm{rate}\\ & =& \left(\$300,000-\$53,920\right)\times 12\%\\ & =& \$246,080\times \frac{12}{100}\\ & =& \$29,530\\ & & \\ \mathrm{Accumulated}\mathrm{depreciation}& =& \frac{\mathrm{Leased}\mathrm{equipment}}{\mathrm{Total}\mathrm{lease}\mathrm{year}}\\ & =& \frac{\$300,000}{8}\\ & =& \$37,500\end{array}$