[Anonymous]

Steam Co. acquired equipment under a capital lease for six years. Minimum lease payments were $60,000 payable annually at year-end. The interest rate was 5% with an annuity factor for six years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?

The answer is 304,542 x .05 = 15,227

The 60,000 payable annually at year-end is throwing me off. Can someone please do the journal entry for this?

[OdellBj]

Pv of lease = 60,000 * 5.0757 = 304,542.

At beginning of lease :
Debit Lease Asset 304,542
Credit Lease Liability 304,542

When Payment is made at year end:
Debit Interest Expense 15,227 (304,542 *.05)
Debit Lease Expense 44,773 (60,000 – 15,227)
Credit Cash 60,000

The lease expense will reduce the lease liability to 259,769 (304,542 – 44,773) which will be the new carrying value for next year.

The 60,000 is just a routine payment that is made every period.

If it helps, leases are kinda like amortization of premiums so if you understand that, it can definitely help with understanding leases

[Author]

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