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Journal entries for capital lease

Brennan Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2007. Annual rental payments of $32,000 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance costs are the obligation of the lessee. The interest rate used by the lessor in setting the payment schedule is 10%; Brennan's incremenatl borrowing rate is 12%. Brennnan is unaware of the rate being used by the lessor. At the end of the lease, Brennan has the option tobuy the equipment for $1, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Brennan uses the straight-line method of depreciation on similar owned equipment.

Instructions:
(Round all numbers to the nearest dollar)
(a) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2007 by Brennan. (Assume no residual value).
(b) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2008 by Brennan. (Prepare the lease amortization schedule for all five payments).
(c) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2009, by Brennan.
(d) What amounts would apprea on Brennan's December 31, 2009 balance sheet relative to the lease arrangement?

Remit in excel

Solution Preview

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In capital lease
31-Dec-07 Leased Equipment Under Capital Leases 129,195 The lease value will be the present value of all payments
Lease Liability 129,195 We use the annuity due factor for 5 years and 12% since the
(To record leased asset and related payments are made at the beginning of period
obligations at the present value of 5 Annuity due factor is
future annual payments of $32,000
discounted at 12%, $32,000 X 4.03735) Since Brennan is unaware of the Lessor's rate of 10%, we will use 12%

31-Dec-07 Lease Liability 32,000 The first payment is made at the inception of ...

Solution Summary

The solution explains the journal entries for a capital lease.

$2.19