Question

Question: Rick Kleckner Corporation recorded a finance 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 residual value. Prepare Kleckner Corporation’s December 31, 2017, adjusting entries. Assume straight-line depreciation.

Short answer

Answer

The interest payable is $29,530.

The accumulated depreciation capital lease is $37,500.

Step-by-step solution

Meaning of Finance Lease

A finance lease is a type of financing in which a leasing business(the lessor or owner) buys an asset on behalf of the user (commonly referred to as the hirer or lessee) and rents it to them for a defined amount of time.

Preparing adjusting 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:

Calculation of Interest payable

$$\begin{gathered} \text{interestpayable=(FinannceLease-Leasepayments)×interestrate} \\ =(\$300,000-\$53920)\times 12\% \\ =\$246,080\times \frac{12}{100} \\ =\$29.530 \end{gathered}$$

Calculation of accumulated depreciation capital lease

$$\begin{gathered} \text{accumulateddepreciationcapitallease=}\frac{\text{financelease}}{\text{usefullife}} \\ \text{=}\frac{\$300,000}{8} \\ \text{=\$37,500} \end{gathered}$$