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Amortization Schedule and Journal Entries for Lessee - Laura Leasing Company

Laura Leasing Company signs an agreement on January 1, 2007, to lease equipment to Plote Company. The information at the top of page 1136 relates to this agreement.
1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
2. The fair value of the asset at January 1, 2007, is $80,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
4. Plote Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $900 to Rocky Mountain Insurance Company for insurance and (2) $1,600 to Laclede County for property taxes.
5. The agreement requires equal annual rental payments of $18,142.95 to the lessor, beginning on January 1, 2007.
6. The lessee's incremental borrowing rate is 12%. The lessor's implicit rate is 10% and is known to the lessee.
7. Plote Company uses the straight-line depreciation method for all equipment.
8. Plote uses reversing entries when appropriate.

Instructions
(Round all numbers to the nearest cent.)
(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
(b) Prepare all of the journal entries for the lessee for 2007 and 2008 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.

Solution Preview

See the attached file if the formatting here is not correct. Thanks

First we need to determine whether the lease is a capital lease or operating lease.

This is a capital lease because:
1. The lease term (five years) > 75% of the remaining economic life of the asset (five years)
2. PV of minimum lease payments = Annual rental payment*PV of an annuity due of 1 for n = 5, i = 10%
=$18,142.95 * 4.16986 =$75,653.56
exceeds 90% of the fair value of the asset ($80,000).
PV of minimum lease payments

(a) Lease Amortization Schedule

Date Annual Lease Interest (10%) Reduction of Lease Liability
Payment on Liability Lease Liability After Lease payment

1/1/07 ...

Solution Summary

Word document attached shows the amortization schedule and journal entries for Laura Leasing Company.

$2.19