Question

Skysong Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 4 years and requires equal rental payments of $40,654 at the beginning of each year of the lease, starting on the commencement date (December 31, 2019). The equipment has a fair value at the commencement date of the lease of $140,000, an estimated useful life of 4 years, and no estimated residual value. The appropriate interest rate is 11%. Click here to view factor tables. Prepare Skysong’s 2019 and 2020 journal entries, assuming Skysong depreciates similar equipment it owns on a straight-line basis.

Answer 1

Date Account Titles and Explanation Debit Credit

31/12/19 Leased Assets $140,000

Lease liability $140,000

(To record lease liability)

31/12/19 Lease liability $40,654

Cash $40,654

(To record lease payment)

31/12/19 Interest expenses $10,928

[(140,000-40,654)*11%

Lease liability $29,726

Cash $40,654

(To record interest expenses)

31/12/19 Amortization expense ($140,000/4) $35,000

Right of use Assets $35,000

(To record amortization expense)