Question

(Lessee Computations and Entries, Capital Lease with Unguaranteed Residual Value) Assume the same data as in P21-10 with National Airlines having an incremental borrowing rate of 10%.

George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is \(278,072, and its unguaranteed residual value at the end of the lease term is estimated to be \)20,000. National will pay annual payments of \(40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of \)180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(c) Prepare all of the lessee’s journal entries for the first year. Assume straight-line depreciation.

Short answer

Accumulated depreciation = $27,036

Step-by-step solution

Meaning of Straight-line depreciation

The method or technique that is recognized the carrying value of a fixed asset over its useful life is term as straight-line depreciation. When there is no specific pattern to the way an asset will be used over time, this method is used.

Preparing Journal entries

Date	Particular	Debit ($)	Credit ($)
Beginning of the Year	Leased Equipment	270,361
	Lease Liability		270,361
	(To record the lease of computer equipment using the capital lease method)
	Lease Liability	40,000
	Cash		40,000
	(To record the first rental payment)
End of the Year	Interest Expense	23,036
	Interest Payable		23,036
	(To record accrual of annual interest on lease liability)
	Depreciation Expense	27,036
	Accumulated Depreciation Capital Leases		27,036
	(To record depreciation expense for the first year)

Working notes:

Calculation of accumulated depreciation

$$\begin{gathered} \text{Depreciation =}\frac{\text{Lease}\text{equipment}}{\text{Lease}\text{period}} \\ =\frac{\$270,361}{10} \\ =\$27,036 \end{gathered}$$