I. Leases
On January 1, 2025, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2025. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effectiveinterest basis. Cage’s incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.
Instructions:
(a) Prepare the journal entry or entries that Cage should record on January 1, 2025. (Show two separate entries. One for recording the leased asset and one to record the initial payment).
(b) Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2025. Include an amortization schedule.
(c) Prepare the journal entry to record the lease payment of January 1, 2026, assuming reversing entries are not made. (The assumption referenced in this question means that there was no initial accrual of the interest expense with a corresponding credit to interest payable. Therefore, there would be no reversing entry made at the time of payment (i.e. no debit to interest payable to reverse the accrual). So, what accounts would be affected when this journal entry is made assuming these facts?)
(d) What amounts will appear on the lessee’s December 31, 2025 balance sheet relative to the lease contract?
II. FASB Research
Daniel Hardware Co. is considering alternative financing arrangements for equipment used in its warehouses. Besides purchasing the equipment outright, Daniel is also considering a lease. Accounting for the outright purchase is fairly straightforward, but because Daniel has not used equipment leases in the past, the accounting staff is less informed about the specific accounting rules for leases. The staff is aware of some general lease rules related to “right-of-use,” but they are unsure how the accounting rules apply to their situation. Daniel has asked you to conduct some research on these items related to lease capitalization criteria.
Instructions:
Go to: http://www2.aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (The username and password to log in is located under Course Information in Blackboard.)
(a) What is included in the measurement of (1) the lease liability and (2) the right-ofuse asset?
(b) Besides the non-cancelable term of the lease, what are other considerations in determining the “lease term”?
(c) When should a lessee account for a lease modification? What procedures are followed?
Leases
On January 1, 2025, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of
$120,987 at the beginning of each year, starting January 1, 2025. The leased equipment is to be capitalized at
$550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an
effective-interest basis. Cage’s incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is
known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful
life of 5 years and no residual value.
Instructions:
(a) Prepare the journal entry or entries that Cage should record on January 1, 2025. (Show two separate entries. One
for recording the leased asset and one to record the initial payment).
(b) Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2025.
Include an amortization schedule.
(c) Prepare the journal entry to record the lease payment of January 1, 2026, assuming reversing entries are not
made. (The assumption referenced in this question means that there was no initial accrual of the interest expense with
a corresponding credit to interest payable. Therefore, there would be no reversing entry made at the time of payment
(i.e. no debit to interest payable to reverse the accrual). So what accounts would be affected when this journal entry is
made assuming these facts?)
(d) What amounts will appear on the lessee’s December 31, 2025 balance sheet relative to the lease contract?
Note about journal entry format:
Enter debits first
Points may be deducted for incorrect account names.
Display whole numbers for journal entries
(a)
Debit
Jan.1
Right of Use Asset
Lease Liability
(To record the leased asset.)
Jan. 1
Lease Liability
Cash
(To record initial payment. )
Debit
Amortization Expense
Right of Use Asset
(To record amortization.)
Dec. 31
Interest Expense
Lease Liability
(To record interest expense. )
(c)
Debit
Jan. 1 2026
GRADING
Part (a)
Cell Ref Correct/Incorrect
Points awarded
0
H14
INCORRECT
0
H18
INCORRECT
Part (b)
H25
H29
(b)
Dec. 31
Credit
Credit
Date
01/01/25
01/01/25
01/01/26
01/01/27
01/01/28
01/01/29
Balance of
Lease
Liability
You need to use formulas and cell references
in the amortization schedule or your numbers
may not agree to the grading schedule.
Note: For the initial balance (cell F41), type in
the amount (rounded to the nearest whole
dollar)
$
(d)
Interest (5%) on Liability
–
$
–
$
–
What amounts will appear on the lessee’s balance sheet at December 31, 2025?
Current liabilities:
Lease liability
Long-term liabilities:
Lease liability
Non-current assets:
Right-of-use asset
Amortization Schedule
F41
INCORRECT
F42
INCORRECT
F43
INCORRECT
F44
INCORRECT
F45
INCORRECT
0
0
0
0
0
Part (c )
H35
INCORRECT
0
Part (d)
F55
F57
F60
AMORTIZATION SCHEDULE
Reduction of
Lease
Liability
0
0
Credit
Lease Liability
Cash
(To record lease payment on Jan. 1 2026)
Annual
Lease
Payment
INCORRECT
INCORRECT
INCORRECT
INCORRECT
INCORRECT
0
0
0
0
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Title Page
Citation
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