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 15.25P

(1)

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 H Consulting (Lessee) to record the right-of-use asset and lease liability at January 1, 2018.

(1)

Expert Solution
Check Mark

Explanation of Solution

Transaction on January 01, 2018: Record the lease payable.

Date Accounts title and explanation Post Ref.

Debit

($)

Credit

($)

    Right-of-use asset (1)   16,251  
  Lease Payable     16,251
  (To record the lease payable)      

Table (1)

Working note:

Present value of lease payments = [(Annual lease payment in 2018× PVIF(5%,1))+(Annual lease payment in 2019× PVIF(5%,2))+(Annual lease payment in 2020× PVIF(5%,3))]=[($7,000× 0.86384)+($6,000× 0.90703)+($5,000× 0.95238)]=$6,047+$5,442+$4,762=$16,251 (1)

Explanation:

  • Right-of-use asset is an asset. There is an increase in asset. Therefore, debit right-of-use asset account by $16,251.
  • Lease payable is a liability. There is an increase in liability. Therefore, credit lease liability by $16,251.

(2)

To determine

To Prepare: appropriate entries for H Consulting (Lessee) to record the right-of-use asset and lease liability at December31, 2018.

(2)

Expert Solution
Check Mark

Explanation of Solution

Transaction on December 31, 2018:

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
  Interest expenses (2)   813  
  Lease payable (Difference)   4,187  
         Cash     5,000
  (To record annual lease payment and interest expenses.)      
         
  Amortization expense (3)   5,187  
         Right-of-use asset     5,187
  (To record amortization expense.)      

Table (2)

Working note:

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

Interest expense=Rate of interest×Lease liability initial balance=5%×$16,251=$813 (2)

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

Amortization expenses = Annual lease paymentsInterest expense=$6,000$813(2)=$5,187 (3)

Explanation:

Transaction on December 31, 2018: Record lease payments and interest expense

  • Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $813.
  • Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $4,187.
  • Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $5,000.

Transaction on December 31, 2018: Record amortization expense

  • Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $5,187.
  • Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $5,187.

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.

(3)

To determine

To Prepare: appropriate entries for H Consulting (Lessee) to record the right-of-use asset and lease liability at December 31, 2019.

(3)

Expert Solution
Check Mark

Explanation of Solution

Transaction on December 31, 2019:

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
  Interest expenses (4)   603  
  Lease payable (Difference)   5,397  
         Cash     6,000
  (To record annual lease payment and interest expenses.)      
         
  Amortization expense (5)   5,397  
         Right-of-use asset     5,397
  (To record amortization expense.)      

Table (3)

Working note:

Calculate the amount of interest expense for December 31, 2019 as follows:

Interest expense=Rate of interest×Lease liability outstanding balance=5%×($16,251$4,187)=$603 (4)

Calculate the amortization expense for December 31, 2019 as follows:

Amortization expenses = Annual lease paymentsInterest expense=$6,000$603(4)=$5,397 (5)

Explanation:

Transaction on December 31, 2019: Record lease payments and interest expense

  • Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $603.
  • Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $5,397.
  • Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $6,000.

Transaction on December 31, 2019: Record amortization expense

  • Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $5,397.
  • Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $5,397.

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.

(4)

To determine

To Prepare: appropriate entries for H Consulting (Lessee) to record the right-of-use asset and lease liability at December 31, 2020.

(4)

Expert Solution
Check Mark

Explanation of Solution

Transaction on December 31, 2020:

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
  Interest expenses (6)   333  
  Lease payable (Difference)   6,667  
         Cash     7,000
  (To record annual lease payment and interest expenses.)      
         
  Amortization expense (7)   5,667  
         Right-of-use asset     5,667
  (To record amortization expense.)      

Table (4)

Working note:

Calculate the amount of interest expense for December 31, 2020 as follows:

Interest expense=Rate of interest×Lease liability outstanding balance=5%×($16,251$4,187$5,397)=$333 (6)

Calculate the amortization expense for December 31, 2020 as follows:

Amortization expenses = Annual lease paymentsInterest expense=$6,000$333(6)=$5,667 (7)

Transaction on December 31, 2020: Record lease payments and interest expense

  • Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $333.
  • Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $6,667.
  • Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $7,000.

Transaction on December 31, 2020: Record amortization expense

  • Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $5,667.
  • Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $5,667.

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.

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