Question

Your client, Keith Teal Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 27 years. Teal has an investment cost of $430,300 in the machine, which has a useful life of 27 years and no salvage value at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 27 equal rental payments at the end of each of the next 27 years.
A. Prepare an amortization schedule that would be suitable for the lessee for the lease term. (Round answers to 0 decimal places, e.g. 5,265.)
B. Prepare all of the journal entries for the lessee for 2020 and 2021 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,265. Record journal entries in the order presented in the problem.)

Answer 1

Answer:

Souvenirs Corporation (Lessee)

A. Amortization Schedule

Beginning Balance Interest Principal Ending Balance

1 $430,300.00 $47,333.00 $3,007.44 $427,292.56

2 $427,292.56 $47,002.18 $3,338.26 $423,954.31

3 $423,954.31 $46,634.97 $3,705.46 $420,248.84

4 $420,248.84 $46,227.37 $4,113.06 $416,135.78

5 $416,135.78 $45,774.94 $4,565.50 $411,570.28

6 $411,570.28 $45,272.73 $5,067.71 $406,502.57

7 $406,502.57 $44,715.28 $5,625.15 $400,877.42

8 $400,877.42 $44,096.52 $6,243.92 $394,633.50

9 $394,633.50 $43,409.68 $6,930.75 $387,702.74

10 $387,702.74 $42,647.30 $7,693.14 $380,009.61

11 $380,009.61 $41,801.06 $8,539.38 $371,470.23

12 $371,470.23 $40,861.73 $9,478.71 $361,991.52

13 $361,991.52 $39,819.07 $10,521.37 $351,470.15

14 $351,470.15 $38,661.72 $11,678.72 $339,791.43

15 $339,791.43 $37,377.06 $12,963.38 $326,828.05

16 $326,828.05 $35,951.09 $14,389.35 $312,438.69

17 $312,438.69 $34,368.26 $15,972.18 $296,466.51

18 $296,466.51 $32,611.32 $17,729.12 $278,737.39

19 $278,737.39 $30,661.11 $19,679.32 $259,058.07

20 $259,058.07 $28,496.39 $21,844.05 $237,214.02

21 $237,214.02 $26,093.54 $24,246.89 $212,967.12

22 $212,967.12 $23,426.38 $26,914.05 $186,053.07

23 $186,053.07 $20,465.84 $29,874.60 $156,178.47

24 $156,178.47 $17,179.63 $33,160.81 $123,017.67

25 $123,017.67 $13,531.94 $36,808.49 $86,209.17

26 $86,209.17 $9,483.01 $40,857.43 $45,351.75

27 $45,351.75 $4,988.69 $45,351.75 -$0.00

Payment Every Year = $50,340.44

B. Journal Entries for first two years of the lease for the Lessee:

2020:

Debit Right of Use Asset $1,359,191.80

Credit Lease Liability $1,359,191.80

To record the lease for 27 years.

Debit Lease Liability $3,007.44

Debit Interest on Lease $47,333.00

Credit Cash $50,340.44

To record the lease interest expense.

2021:

Debit Lease Liability $3,338.26

Debit Interest on Lease $47,002.18

Credit Cash $50,340.44

To record the lease interest expense.

Explanation:

a) Data and Calculations

Cost of Machine = $430,300

Useful life of machine = 27 years

Salvage value = $0

Expected return on investment = 11%

Period of equal rental payments = 27 years

From the online financial calculator:

Payment Every Year = $50,340.44

Total of 27 Payments = $1,359,191.80

Total Interest = $928,891.80

Amortization Table shows that at the end of 27 years:  

Principal = 32%

Interest = 68%  of the total lease payments.