Concept explainers
Lessee; operating lease
• LO15–4
Grichuk Power leased high-tech electronic equipment from Kolten Leasing on January 1, 2018. Kolten purchased the equipment from Wong Machines at a cost of $250,000, its fair value.
Related Information: | |
Lease term | 2 years (8 quarterly periods) |
Quarterly lease payments | $15,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter |
Economic life of asset | 5 years |
Interest rate charged by the lessor | 8% |
Required:
Prepare appropriate entries for Grichuk Power from the beginning of the lease through December 31, 2018. December 31 is the fiscal year end for each company. Appropriate
Operating lease
This type of lease refers to the lease where the lessor permits the lessee to make use of the asset for a specified time period by charging rent without actual transfer of ownership of the asset which is leased. This type of lease cancellable and is of short term.
To prepare: appropriate entries for Company GP (Lessee) from the beginning of lease through December 31, 2018.
Explanation of Solution
Prepare journal entry for Company GP in the month of January 1, 2018
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
January | 1 | Right-of-use asset (1) | 112,080 | ||
Lease Payable | 112,080 | ||||
(To record the lease payable) |
Table (1)
Explanation:
- Right-of-use asset is an asset. There is an increase in asset. Therefore, debit right-of-use asset account by $112,080.
- Lease payable is a liability. There is a increase in liability. Therefore, credit lease liability by $112,080.
Transaction on January 1, 2018: Record the quarterly lease payments.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Lease payable | 15,000 | |||
Cash | 15,000 | |||
(To record quarterly lease payment.) |
Table (2)
Explanation:
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $15,000.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $15,000.
Transaction on March 31, 2018: Record the lease payments and interest expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (2) | 1,942 | |||
Lease payable (Difference) | 13,058 | |||
Cash | 15,000 | |||
(To record quarterly lease payment and interest expenses.) |
Table (3)
Explanation:
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $1,942.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $13,058.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $15,000.
Transaction on March 31, 2018: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (3) | 13,058 | |||
Right-of-use asset | 13,058 | |||
(To record amortization expense.) |
Table (4)
Explanation:
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $13,058.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $13,058.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
Transaction on June 30, 2018: Record the lease payments and interest expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (4) | 1,681 | |||
Lease payable (Difference) | 13,319 | |||
Cash | 15,000 | |||
(To record quarterly lease payment and interest expenses.) |
Table (5)
Explanation:
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $1,681.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $13,319.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $15,000.
Transaction on June 30, 2018: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (5) | 13,319 | |||
Right-of-use asset | 13,319 | |||
(To record amortization expense.) |
Table (6)
Explanation:
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $13,319.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $13,319.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
Transaction on September 30, 2018: Record the lease payments and interest expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (6) | 1,414 | |||
Lease payable (Difference) | 13,586 | |||
Cash | 15,000 | |||
(To record quarterly lease payment and interest expenses.) |
Table (7)
Explanation:
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $1,414.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $13,586.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $15,000.
Transaction on September 30, 2018: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (7) | 13,586 | |||
Right-of-use asset | 13,586 | |||
(To record amortization expense.) |
Table (8)
Explanation:
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $13,586.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $13,586.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
Transaction on December 31, 2018: Record the lease payments and interest expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (8) | 1,142 | |||
Lease payable (Difference) | 13,858 | |||
Cash | 15,000 | |||
(To record quarterly lease payment and interest expenses.) |
Table (9)
Explanation:
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $1,142.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $13,858.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $15,000.
Transaction on December 31, 2018: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (9) | 13,858 | |||
Right-of-use asset | 13,858 | |||
(To record amortization expense.) |
Table (10)
Explanation:
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $13,858.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $13,858.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
Working notes:
The number of years is taken as 8 quarters
Use the present value factor 7.47199 (Present value factor $1 for 8 quarters at 2% rate) for calculating present value of lease payments.
Calculate the present value of lease payments as follows:
Calculate the amount of interest expense for March 31, 2018 as follows:
Calculate the amortization expense for March 31, 2018 as follows:
Calculate the amount of interest expense for June 30, 2018 as follows:
Calculate the amortization expense for June 30, 2018 as follows:
Calculate the amount of interest expense for September 30, 2018 as follows:
Calculate the amortization expense for September 30, 2018 as follows:
Calculate the amount of interest expense for December 31, 2018 as follows:
Calculate the amortization expense for December 31, 2018 as follows:
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