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Python Company leased equipment from Hope Leasing on January 1, 2006. Calculate the carrying value of the lease payable and give journal entires.

Python Company leased equipment from Hope Leasing on January 1, 2006. Hope
purchased the equipment at a cost of $222,666.

Other information:
Lease term 3 years
Annual payments $80,000 on January 1 each year starting in 2006
Life of asset 3 years
Fair value of asset $222,666
Implicit interest rate 8%
Incremental rate 8%
There is no expected residual value.

Required:
Prepare appropriate journal entries for Python for 2006 and 2007. Assume straight-line depreciation and a December 31 year-end.

Also, calculate the carrying value of the lease payable at December 31, 2007.

Solution Preview

First of all, we compute the The Present Value Amount of an annuity due of 1 for 3 periods (years) at 8% (r = .08) = (1 - 1/(1+r)^3)*(1+r)/r = 2.783.

Compute the present value of the minimum lease payments, using the lessee's incremental borrowing rate, unless:
? The lessor's implicit rate is lower, and
? The lessee has knowledge of the lower rate.
It is the same in our case (8%). So we have:
$80,000 x 2.783 (PV of an annuity due for 3 periods at 8%) = $222,640

Now we need to record the leased asset at the lesser of the assets fair market value at the ...

Solution Summary

The process and computations are shown for you.

$2.19