Question

Metlock enters into an agreement with Traveler Inc. to lease a car on December 31, 2019. The following information relates to this agreement.
1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The remaining economic life of the car is 3 years, and it is expected to have no residual value at the end of the lease term.
2. The fair value of the car was $15,270 at commencement of the lease.
3. Annual payments are required to be made on December 31 at the end of each year of the lease, beginning December 31, 2020. The first payment is to be of an amount of $5,652.82, with each payment increasing by a constant rate of 5% from the previous payment (i.e., the second payment will be $5,935.46 and the third and final payment will be $6,232.23).
4. Metlock’ incremental borrowing rate is 8%. The rate implicit in the lease is unknown. 5. Metlock uses straight-line depreciation for all similar cars.

Required:
Prepare Windsor’ journal entries for 2016, 2017, and 2018.

Answer 1

Answer:

Dec. 31, 2016

Dr Right use Asset $15,270

Cr To Lease Liability $15,270

Dec. 31, 2017

Dr Interest expense $1,221.6

Dr Lease liability $4,431.22

Cr Cash $5,652.82

Dec. 31, 2017

Dr Amortization expense$5,090

Cr To Right-of-use Asset $5,090

Dec. 31, 2018

Dr Interest expense $867.10

Dr Lease Liability $5,071.36

Cr To Cash A/c $5,935.46

Dec. 31, 2018

Dr Amortization expense $5,090

Cr To Right-of-use asset A/c $5,090

Explanation:

Date Particulars Debit ($) Credit ($)

Dec. 31, 2016

Dr Right use Asset $15,270

Cr To Lease Liability $15,270

Dec. 31, 2017

Dr Interest expense

($15,270 × 8% borrowing rate) $1,221.6

Dr Lease liability

($5,652.82 - $1,221.6) $4,431.22

Cr Cash $5,652.82

(To record interest expense)

Dec. 31, 2017

Dr Amortization expense (Asset value /Estimated useful life $15,270/ 3) $5,090

Cr To Right-of-use Asset $5,090

(To record amortization of the Right-of-use asset)

Dec. 31, 2018

Dr Interest expense

(($15,270 - $4,431.22) × 8%) $867.10

Dr Lease Liability $5,071.36

Cr To Cash A/c $5,935.46

(To record interest expense)

Dec. 31, 2018

Dr Amortization expense ($15,270 / 3) $5,090

Cr To Right-of-use asset $5,090

(To record amortization of the right-of-use asset)