Question

On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $412,184 and has an expected economic life of five years. Aqua expects the residual value at December 31, 2024, to be $50,000. Negotiations led to Maywood guaranteeing a $70,000 residual value. Equal payments under the lease are $100,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 5% interest rate when calculating lease payments.
Required:
1. Prepare the appropriate entry for Maywood on January 1, 2021, to record the lease.
2. Prepare all appropriate entries for Maywood on December 31, 2021, related to the lease.

Answer 1

Answer:

1/1/2021

Dr Right of use Asset 371,049

Dr Lease Payable 371,049

12/31/2021

Dr Interest Expense 18,552

Dr Lease Payable 81,448

Cr Cash 100,000

12/31/2021

Dr Amortization Expense 92,762

Cr Right of use Asset 92,762

Explanation:

Maywood Hydraulics

First step is to Calculate for PMT, FV and PV

N= 4, I= 5, PMT=100,000, FV=20,000, PV= 371,049

1/1/2021

Dr Right of use Asset 371,049

Dr Lease Payable 371,049

12/31/2021

Dr Interest Expense 18,552

(371,049*.05)

Dr Lease Payable 81,448

(100,000-18,552)

Cr Cash 100,000

12/31/2021

Dr Amortization Expense 92,762

Cr Right of use Asset 92,762

[ (371,049-0)/4 years]