Crest Industries leased store furnishings from Santa Fe Leasing on January 1 of the current year. Santa Fe had purchased the furnishings from Steelman Enterprises for $700,000.

Other information:
Lease term
5 years
Quarterly Payments
$45,681 at the beginning of each quarter
Life of Asset
5 years
Fair value of Asset
$700,000
Implicit annual interest rate
12%
Incremental rate
12%
There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year.

Refer to Crest Industries:
1. Prepare an amortization schedule for the first year of the lease.
2. Prepare the appropriate journal entries for Crest for the first two payments of the current year and depreciation expense for December 31 of the current year.
3. Show how the lease-related information will be presented on Crest’s financial statements at December 31 of the current year.

What will be an ideal response?

Answer:
1. Amortization Schedule

Pmt #
Payment
Interest
3% of prev. bal
Principal
(Pmt – Interest)
Balance
$700,000
1
$45,681
$ –
$45,681
$654,319
2
45,681
19,630
26,051
628,268
3
45,681
18,848
26,833
601,435
4
45,681
18,043
27,638
573,797

2. Journal Entries
January 1
Leased Asset
700,000

Lease Payable

700,000
Lease Payable
45,681

Cash

45,681

April 1
Lease Payable
26,051

Interest Expense
19,630

Cash

45,681

December 31
Depreciation Expense
140,000

Accumulated Depreciation

140,000

3.
Property, Plant, and Equipment
Leased Asset, net of Accumulated Depreciation $560,000

Current Liabilities
Interest Payable $17,214
Lease Payable, Current Portion 119,095

Long-Term Liabilities
Lease Payable, Long-Term Portion $454,709