Question

Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of \(137,899 (including the executory costs of \)6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at \(6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at \)550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.

Instructions

(e) Prepare the journal entry to record the lease payment of January 1, 2018, assuming reversing entries are not made.

Short answer

Annual lease payments are $131,899

Step-by-step solution

Meaning of lease payments.

Lease payment refers to amonthly rental payment made by one party to anotherfor the use of property or equipment for a specific period of time.

Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
	Executory Costs	6,000
	Interest Payable	41,810
	Lease Liability	90,089
	Cash		137,899

Preparing lease amortization schedule.

CAGE COMPANY (Lessee) Lease Amortization Schedule
Date	Annual Lease Payments	Interest (10%) on Liability	Reduction of Lease Liability	Lease Liability
1/1/17				$550,000
1/1/17	$131,899	$ 0	$131,899	418,101
1/1/18	131,899	41,810	90,089	328,012
1/1/19	131,899	32,801	99,098	228,914