Question

Marin Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 8 years and requires equal rental payments of $56,394 at the beginning of each year of the lease, starting on the commencement date (December 31, 2019). The equipment has a fair value at the commencement date of the lease of $350,000, an estimated useful life of 8 years, and no estimated residual value. The appropriate interest rate is 8%.
Required:
Prepare Marin's 2019 and 2020 journal entries, assuming Marin depreciates similar equipment it owns on a straight-line basis.

Answer 1

Answer and Explanation:

The journal entries are shown below:

1. Right of use assets$350,000      ($56,394 × 6.2064)

           To lease liability  $350,000

(Being the lease liability is recorded)

Refer to the present value annuity due factor table for 6.2064

2. Lease liability $56,394

        To cash $56,394

(being cash paid is recorded)

3. Lease liability $32,905

   Interest expense  $23,489    {($350,000 - $56,394) × 8%}

            To Cash   $56,394

(Being cash paid is recorded)  

4. Amortization expense $43,750   {$350,000 ÷ 8 years)

         To Right of use asset $43,750

(Being the amortization expense is recorded)