Question

(Lessee Computations and Entries, Capital Lease with Guaranteed Residual Value) Assume the same data as in P21-13 and that Chambers Medical Center has an incremental borrowing rate of 10%.

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $411,324,anditsguaranteedresidualvalueattheendofthenoncancelableleasetermisestimatedtobe$15,000. The hospital will pay rents of $60,000atthebeginningofeachyearandallmaintenance,insurance,andtaxes.AmiranteInc.incurredcostsof$250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

Instructions

(c) Prepare all of the lessee’s journal entries for the first year.

Short answer

The debit and credit side of the journal is $546,088

Step-by-step solution

Step 1:Meaning of Interest revenue

Interest revenue is the income earned by trade from any investments it makes or the debt it holds. Interest revenue can be found by deducting present value with rental payments. The difference amount is multiplied by the implicit interest rate

Preparing journal entries (Lessee)

Date	Particular	Debit ($)	Credit ($)
Beginning of the Year	Leased Equipment	411,324
	Lease Liability		411,324
	(To record the lease of x-ray equipment using the capital lease method)
	Lease Liability	60,000
	Cash		60,000
	(To record payment of annual lease obligation)
End of the Year	Interest Expense	35,132
	Interest Payable		35,132
	(To record accrual of annual interest on lease obligation)
	Depreciation Expense	39,632
	Accumulated Depreciation Capital Leases		39,632
	(To record depreciation expense for year 1 using the straight-line method)

Working Notes:

Calculation of accumulated depreciation

$$\begin{gathered} \text{Accumulated}\text{depreciation =}\frac{\left(\text{Machine} \text{price - guranteed}\text{residual}\text{value}\right)}{\text{Lease}\text{period}} \\ =\frac{\left(\$411,324-\$15,000\right)}{10} \\ =\frac{\$396,324}{10} \\ =\$39,632 \end{gathered}$$