Question

On January 1, 2021, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $17,500 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by Computer World at a cost of $105,000 and were expected to have a useful life of six years with no residual value. Both firms record amortization and depreciation semi-annually.
Required:
1. Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease.
2. Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first year of the lease.
• 1 Record the beginning of the lease for Nath-Langstrom Services.
• 2 Record the lease payment and interest expense for Nath-Langstrom Services.
• 3 Record the amortization expense for Nath-Langstrom Services.
• 4 Record the lease payment and interest expense for Nath-Langstrom Services.
• 5 Record the amortization expense for Nath-Langstrom Services.
• 6 Record the lease revenue received by ComputerWorld Leasing.
• 7 Record the Depreciation expense for ComputerWorld Leasing.
• 8 Record the lease revenue received by ComputerWorld Leasing.
• 9 Record the Depreciation expense for ComputerWorld Leasing.

Answer 1

Answer:

Lessee journal entries:

lease expense 17,500 debit

          cash            17,500 credit

--to record lease payment June 30th, 2021--

lease expense 17,500 debit

          cash            17,500 credit

--to record lease payment Dec  31st, 2021--

The lessee does not depreciate the equipment as it is not part of their company.

Lessor journal entries:

cash   17,500 debit

 lease revenue   17,500 credit

--to record cash collection on Nath-Langstrom June 30th--

depreciation expense  8,750 debit

    acc depreciation- equip    8,750 credit

--to record depreciation on leased equipment June 30th--

cash   17,500 debit

 lease revenue   17,500 credit

--to record cash collection on Nath-Langstrom Dec 31st--

depreciation expense  8,750 debit

    acc depreciation- equip    8,750 credit

--to record depreciation on leased equipment Dec 31st--

Explanation:

This is an operating lease as the equipment returns to the firm at the end of the contract and it is below 75% of the useful life (2 years / 6 years = 33%)

amortization on the equipment:

(cost - salvage value ) / useful life

(105,000 - 0 )  / 6  = 17,500 per year

semiannual depreciation: 17,500 / 2 = 8,750