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 6%. The contract calls for four rent payments of $14,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $98,000 and were expected to have a useful life of seven years with no residual value. Both firms record amortization and depreciation semiannually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 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.

Answer 1

Answer:

Nath-Langstrom Services, Inc.

And

ComputerWorld Leasing

1. Journal entries by Nath-Langstrom Services for the first year of the lease:

Jan. 1, 2021:

Debit Right of Use Asset $52,039.38

Credit Lease Liability $52,039.38

To record the Right of Use Asset.

June 30, 2021:

Debit Interest Expense $1,561.18

Debit Lease Liability $12,438.82

Credit Cash $14,000

To record the semiannual payment of the lease liability.

Debit Lease Amortization Expense $13,010

Credit Accumulated Amortization $13,010

To record amortize the Right of Use Asset.

December 31, 2021:

Debit Interest Expense $1,188.02

Debit Lease Liability $12,811.98

Credit Cash $14,000

To record the semiannual payment of the lease liability.

Debit Lease Amortization Expense $13,010

Credit Accumulated Amortization $13,010

To amortize the Right of Use Asset.

2. Journal Entries by ComputerWorld Leasing for the first year of the lease:

Jan. 1. 2021:

Debit Lease Receivable $52,039.38

Credit Leased Assets $52,039.38

To record the lease receivable.

June 30, 2021:

Debit Cash $14,000

Credit Interest Income $1,561.18

Credit Lease Receivable $12,438.82

To record the receipt of the first lease payment.

Debit Depreciation Expense $7,000

Credit Accumulated Depreciation $7,000

To depreciate the leased asset.

December 31, 2021:

Debit Cash $14,000

Credit Interest Income $1,188.02

Credit Lease Receivable $12,811.98

To record the receipt of lease payment.

Debit Depreciation Expense $7,000

Credit Accumulated Depreciation $7,000

To depreciation the leased asset.

Explanation:

a) Data and Calculations:

Annual interest rate = 6%

Semiannual rental payment = $14,000

Period of lease = 2 years

Number of lease payments = 4

Cost of computers to ComputerWorld = $98,000

Estimated useful life of computers = 7 years

Residual value = $0

N (# of periods)  4

I/Y (Interest per year)  6

PMT (Periodic Payment)  14000

FV (Future Value)  0

 

Results

PV = $52,039.38

Sum of all periodic payments $56,000.00

Total Interest $3,960.62

Schedule

Period       PV                 PMT                   Interest           FV

1         $52,039.38       $14,000.00       $1,561.18        $39,600.56

2       $39,600.56       $14,000.00       $1,188.02        $26,788.58

Year #1 end

3       $26,788.58       $14,000.00        $803.66         $13,592.23

4       $13,592.23       $14,000.00         $407.77         $0.00