Question

Kingbird enters into an agreement with Traveler Inc. to lease a car on December 31, 2019. The following information relates to this agreement.

1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The remaining economic life of the car is 3 years, and it is expected to have no residual value at the end of the lease term.
2. The fair value of the car was $15,810 at commencement of the lease.
3. Annual payments are required to be made on December 31 at the end of each year of the lease, beginning December 31, 2020. The first payment is to be of an amount of $5,852.82, with each payment increasing by a constant rate of 5% from the previous payment (i.e., the second payment will be $6,145.46 and the third and final payment will be $6,452.73).
4. Kingbird’ incremental borrowing rate is 8%. The rate implicit in the lease is unknown.
5. Kingbird uses straight-line depreciation for all similar cars.
Prepare Kingbird’ journal entries for 2019, 2020, and 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 2 decimal places, e.g. 5,275.25. Record journal entries in the order presented in the problem.)

Answer 1

Dec. 31, 2019

Dr Right use Asset $15,810

To Lease Liability $15,810

Dec. 31, 2020

Dr Interest expense $1,265

Dr Lease liability $4,587.82

Cr ToCash A/c $5,852.82

Dec. 31, 2020

Dr Amortization expense $5,270

Cr To Right-of-use Asset $5,270

Dec. 31, 2021

Dr Interest expense $898

Dr Lease Liability $5,247.46

Cr To Cash $6,145.46

Dec. 31, 2021

Dr Amortization expense $5,270

To Right-of-use asset $5,270

Step-by-step explanation:

Preparation of Kingbird’ journal entries for 2019, 2020, and 2021.

Dec. 31, 2019

Dr Right use Asset $15,810

To Lease Liability $15,810

Dec. 31, 2020

Dr Interest expense $1,265

($15,810 × 8% borrowing rate)

Dr Lease liability $4,587.82

($5,852.82 - $1,265)

Cr ToCash $5,852.82

(To record interest expense)

Dec. 31, 2020

Dr Amortization expense $5,270

(Asset value /Estimated useful life =$15,810/ 3)

Cr To Right-of-use Asset $5,270

(To record amortization of the Right-of-use asset)

Dec. 31, 2021

Dr Interest expense

[($15,810 - $4,587.82) × 8%] $898

Dr Lease Liability $5,247.46

($6,145.46 - $898)

Cr Cash $6,145.46

(To record interest expense)

Dec. 31, 2021

Dr Amortization expense $5,270

($15,810/ 3)

Cr Right-of-use asset $5,270

(To record amortization of the right-of-use asset)