Hoof & Tail Ltd enters into a non-cancellable lease agreement with Equine Industries to lease some equipment under the following conditions:

The interest rate implicit in the lease is 11 per cent and the fair value of the asset at the inception of the lease is $37 031. What are the journal entries to record the lease, the payment at lease inception and the first lease payment in the books of the lessee (rounded to the nearest dollar)?
E) None of the given answers.

Question

Hoof & Tail Ltd enters into a non-cancellable lease agreement with Equine Industries to lease some equipment under the following conditions:

The interest rate implicit in the lease is 11 per cent and the fair value of the asset at the inception of the lease is $37 031. What are the journal entries to record the lease, the payment at lease inception and the first lease payment in the books of the lessee (rounded to the nearest dollar)?
E) None of the given answers.

Quizplus · Accepted Answer

Journal entries for the lease, payment at lease inception, and first lease payment are:

Lease Inception:
Leased Equipment: $37,031
Lease liability: $37,031
(To record lease of equipment)

Payment at Lease Inception:
Lease liability: $8,031
Cash: $8,031
(To record payment at lease inception - calculated as 60 monthly payments of $800 at an 11% interest rate)

First Lease Payment:
Lease Expense: $800
Cash: $800
Lease liability: $617
Interest Expense: $183
(To record first lease payment - calculated as $800 payment less $183 interest expense and $617 reduction of lease liability)

Hoof & Tail Ltd Enters into a Non-Cancellable Lease Agreement