Intermediate Accounting
Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Chapter 15, Problem 15.16E

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 adjusting entries are recorded at the end of each quarter.

Expert Solution & Answer
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To determine

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 [2years×4] as interest is calculated quarterly. The interest rate is calculated as 2% [8%4] as interest is calculated for quarterly.

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:

Present value of lease payments} =Quarterly lease payments×PVIFA(2%,8)=$15,000×7.47199=$112,080 (1)

Calculate the amount of interest expense for March 31, 2018 as follows:

Interest expense=Rate of interest×(Lease liability initial balanceFirst quarterly payment)=2%×($112,080(1)$15,000)=$1,942 (2)

Calculate the amortization expense for March 31, 2018 as follows:

Amortization expenses = Quarterly lease paymentsInterest expense=$15,000$1,942(2)=$13,058 (3)

Calculate the amount of interest expense for June 30, 2018 as follows:

Interest expense=Rate of interest×(Lease liability initial balancequarterly paymentAmortization expense, March 31)=2%×($112,080(1)$15,000$13,058(3))=$1,681 (4)

Calculate the amortization expense for June 30, 2018 as follows:

Amortization expenses = Quarterly lease paymentsInterest expense=$15,000$1,681(4)=$13,319 (5)

Calculate the amount of interest expense for September 30, 2018 as follows:

Interest expense=Rate of interest×(Lease liability initial balancequarterly paymentAmortization expense, March 31 Amortization expense, June 30)=2%×($112,080(1)$15,000$13,058(3)$13,319(5))=$1,414 (6)

Calculate the amortization expense for September 30, 2018 as follows:

Amortization expenses = Quarterly lease paymentsInterest expense=$15,000$1,414(6)=$13,586 (7)

Calculate the amount of interest expense for December 31, 2018 as follows:

Interest expense=Rate of interest×(Lease liability initial balancequarterly paymentAmortization expense, March 31Amortization expense, June 30 Amortization expense, September 30)=2%×($112,080(1)$15,000$13,058(3)$13,319(5)$13,586(7))=$1,142 (8)

Calculate the amortization expense for December 31, 2018 as follows:

Amortization expenses = Quarterly lease paymentsInterest expense=$15,000$1,142(8)=$13,858 (9)

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E 15-16 Lessee; operating lease LO15-4 Baillie Power leased high-tech electronic equipment from Courtney Leasing on January 1, 2024. Courtney purchased the equipment from Doane Machines at a cost of $250,000, its fair value. Related Information: Lease term Quarterly lease payments Economic life of asset 2 years (8 quarterly perlods) $15,000 on Jan. 1, 2024, and on Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter 5 years Interest rate charged by the lessor 8% Required: Prepare appropriate entries for Baillie Power from the beginning of the lease through December 31, 2024. December 31 is the fiscal year end for each company. Appropriate adjusting entries are recorded at the end of each quarter.
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Chapter 15 Solutions

Intermediate Accounting

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lessor; sales-type lease LO152,...Ch. 15 - Residual value; sales-type lease LO152, LO153,...Ch. 15 - Guarantee d residual value LO156 On January 1,...Ch. 15 - Lessors initial direct costs; sales-type lease ...Ch. 15 - Nonlease payments LO152, LO157 On January 1,...Ch. 15 - Lease classification LO151 Each of the four...Ch. 15 - Finance lease; calculate lease payments LO152...Ch. 15 - Finance lease; lessee; balance sheet and income...Ch. 15 - Prob. 15.4ECh. 15 - Sales-type lease; lessor; balance sheet and income...Ch. 15 - Finance lease; lessee LO152 (Note: Exercises 6,...Ch. 15 - Sales-type lease with no selling profit; lessor ...Ch. 15 - Sales-type lease with selling profit; lessor;...Ch. 15 - Prob. 15.9ECh. 15 - Lessor calculation of annual lease payments;...Ch. 15 - Lessee and lessor; sales-type lease with selling...Ch. 15 - Lessee; finance lease; effect on financial...Ch. 15 - Lessee; operating lease; effect on financial...Ch. 15 - Lessor; operating lease; effect on financial...Ch. 15 - Sales-type lease; lessor; income statement effects...Ch. 15 - Lessee; operating lease LO154 Grichuk Power...Ch. 15 - Lessee a nd lessor; operating lease LO154 On...Ch. 15 - Short-term lease LO155 Chance Enterprises leased...Ch. 15 - Lessee; renewal option LO152, LO156 Natick...Ch. 15 - Variable lease payments LO152, LO156 On January...Ch. 15 - Lessee; variable lease payments LO152, LO156 On...Ch. 15 - Lessee; variable lease payments LO152, LO156 On...Ch. 15 - Lessee; renewal options LO152, LO156 On January...Ch. 15 - Calculation of annual lease payments; residual...Ch. 15 - Lessor; sales-type lease; residual value effect on...Ch. 15 - Lease concepts; finance/sales-type leases;...Ch. 15 - Lessee; lessee guaranteed residual value LO152,...Ch. 15 - Calculation of annual lease payments; purchase...Ch. 15 - Finance lease; purchase options; lessee LO152,...Ch. 15 - Purchase option; lessor; sales-type lease; no...Ch. 15 - Nonlease payments; lessor and lessee LO152, LO157...Ch. 15 - Lessors initial direct costs; sales-type lease ...Ch. 15 - Lessors initial direct costs; sales-type lease ...Ch. 15 - Lessors initial direct costs; operating lease ...Ch. 15 - Prob. 15.35ECh. 15 - Prob. 15.36ECh. 15 - Prob. 15.37ECh. 15 - Sale-leaseback Appendix 15 To raise operating...Ch. 15 - Sale-leaseback; operating lease Appendix 15 To...Ch. 15 - Prob. 15.1PCh. 15 - Finance lease LO152 At the beginning of 2018, VHF...Ch. 15 - Lease amortization schedule LO152 On January 1,...Ch. 15 - Finance /sales-type lease; lessee and lessor ...Ch. 15 - Lessee; operating lease; advance payment;...Ch. 15 - Operating lease; scheduled rent increases LO154...Ch. 15 - Lease amortization schedule LO152, LO156 On...Ch. 15 - Reassessment of lease term LO152, LO154, LO156 On...Ch. 15 - Lease concepts; sales-type leases; guaranteed and...Ch. 15 - Prob. 15.10PCh. 15 - Change in lease term; operating lease; lessor ...Ch. 15 - Lessee; renewal option LO152, LO156 High Time...Ch. 15 - Lessee and lessor; lessee guaranteed residual...Ch. 15 - Lessee and lessor; lessor; sales-type lease with...Ch. 15 - Nonlease payments; lessor and lessee LO152, LO157...Ch. 15 - Lessors initial direct costs; operating and...Ch. 15 - Nonlease costs; lessor and lessee LO152, LO157...Ch. 15 - Lessee-guaranteed residual value; unguaranteed...Ch. 15 - Initial direct costs; sales-type lease LO152,...Ch. 15 - Initial dire ct costs; sales-type lease with a...Ch. 15 - Guaranteed residual value; sales-type lease ...Ch. 15 - Unguaranteed residual value; nonlease payments;...Ch. 15 - Purchase option reasonably certain to be exercised...Ch. 15 - Lessee and lessor; lessee guaranteed residual...Ch. 15 - Prob. 15.25PCh. 15 - Prob. 15.26PCh. 15 - Modification of a lease LO152, LO153, LO156 On...Ch. 15 - Finance lease; lessee; financial statement effects...Ch. 15 - Prob. 15.29PCh. 15 - Sales-type lease; lessor; financial statement...Ch. 15 - Prob. 15.31PCh. 15 - Research Case 151 FASB codification; locate and...Ch. 15 - Ethics Case 153 Leasehold improvements LO153...Ch. 15 - Analysis Case 154 Lease concepts; Walmart LO151...Ch. 15 - Communication Case 155 Wheres the gain? 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