Answer:
a) the journal entry to record the signing of the lease agreement:
December 31, 2019, lease agreement signed
Dr Right of use 483,360
Cr Lease liability 483,360
the lease liability must record the present value of the 10 annual lease payments: $68,099 and 8% discount rate:
present value of an annuity due = payment + {payment x [1 - (1 + r)⁻⁽ⁿ⁻¹⁾]/r}
-
payment = 66,699
- r = 8%
- n - 1 = 10 - 1 = 9
PV annuity due = 66,699 + {66,699 x [1 - (1 + 0.08)⁻⁹]/0.08} = 66,699 + 416,661 = $483,360
the journal entries to record the annual lease payments:
December 31, 2019, first annual lease payment
Dr Lease liability 66,699
Cr Cash 66,699
December 31, 2020, second annual lease payment
Dr Lease liability 33,366
Dr Interest expense 33,333
Cr Cash 66,699
interest expense = $416,661 x 8% = $33,333
December 31, 2020, depreciation expense
Dr Depreciation expense - leased building 48,336
Cr Accumulated depreciation - leased building 48,336
December 31, 2021, third annual lease payment
Dr Lease liability 36,035
Dr Interest expense 30,664
Cr Cash 66,699
interest expense = $383,295 x 8% = $30,664
December 31, 2021, depreciation expense
Dr Depreciation expense - leased building 48,336
Cr Accumulated depreciation - leased building 48,336
b) this would increase the right to use asset and lease liability by:
= -$5,000 + $1,000 = $4,000
c) this would increase the right to use asset and lease liability by:
= 5,000 + {5,000 x [1 - (1 + 0.08)⁻⁹]/0.08} = $36,234
