Question

Question: Use the information for Rick Kleckner Corporation from IFRS21-7. Assume that at December 31, 2017, Kleckner made an adjusting entry to accrue interest expense of \(29,530 on the lease. Prepare Kleckner’s January 1, 2018, journal entry to record the second lease payment of \)53,920.

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

Interest payable = $29,530

Step-by-step solution

 Step 1: Meaning of Finance Lease

A financial lease allows a corporation to borrow an asset for a lengthy period of time, with the lease term effectively equaling the asset's life, and the firm capitalizes on the assets in its books. A capital lease is another term for a financial lease.

Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
	Interest Payable	29,530
	Lease Liability	24,390
	Cash		53,920

Working Notes:

Calculation of interest payable

$$\begin{gathered} \text{Interestpayable=(Finanncelease-Leasepayments)×interestrate} \\ =(\$300,000-\$53,920)\times 12\% \\ =\$246,080\times \frac{12}{100} \\ =\$29,530 \end{gathered}$$