Question

Teal Mountain Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 8 years and requires equal rental payments of $54,782 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 $340,000, an estimated useful life of 8 years, and no estimated residual value. The appropriate interest rate is 8%. Click here to view factor tables. Prepare Teal Mountain’s 2019 and 2020 journal entries, assuming Teal Mountain depreciates similar equipment it owns on a straight-line basis

Answer 1

See the explanation below.

Step-by-step explanation:

Date Details Dr ($) Cr ($) .

31 Dec. '19 Leased equipment 340,000

Lease liability 340,000

To record liability form equipment lease. .

31 Dec. '19 Leased liability 54,782

Cash 54,782

To record lease payment. .

31 Dec. '20 Interest expense 22,817.44

Lease liability 31,964.56

Cash 54,782

To record interest expense and lease payment. .

31 Dec. '20 Depreciation expense 42,500

Accumulated depreciation - lease 42,500

To record right-of -use equipment amortization .

Note:

31 Dec. '20 Interest expense = (340,000 - 54,782) * 8% = $22,817.44

31 Dec. '20 Lease liability = $54,782 - $22,817.44 = $31,964.56

31 Dec. '20 Depreciation expense = 340,000 / 8 = $42,500