Other information:
Lease term
4 years
Annual Payments
$90,000 on January 1 beginning with the current year.
Life of Asset
4 years
Fair value of Asset
$326,189
Implicit interest rate
7%
Incremental rate
7%
There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year.
Refer to Stillwater Sports:
Required:
1. Prepare appropriate journal entries for Stillwater Sports for the first year.
2. Show how the lease-related information will be presented on Stillwater’s balance sheet for the first year.
What will be an ideal response?
Answer:
1. Journal Entries
January 1
Leased Asset
326,189
Lease Payable
326,189
Lease Payable
90,000
Cash
90,000
December 31
Interest Expense
16,533
Interest Payable
16,533
[(326,189 – 90,000) × 7%]
Depreciation Expense
81,547
Accumulated Depreciation
81,547
(326,189/4)
2.
Property, Plant and Equipment
Leased Asset, net of Accumulated Depreciation $244,642
Current Liabilities
Interest Payable $16,533
Lease Payable, Current Portion 73,467
Long-term Liabilities
Lease Payable $162,722