(Lessee Entries with Bargain-Purchase Option) The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.

Inception date	May 1, 2017
Annual lease payment due at the beginning of each year, beginning with May 1, 2017	\(21,227.65
Bargain-purchase option price at end of lease term	\) 4,000.00
Lease term	5 years
Economic life of leased equipment	10 years
Lessor’s cost	\(65,000.00
Fair value of asset at May 1, 2017	\)91,000.00
Lessor’s implicit rate	10%
Lessee’s incremental borrowing rate	10%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Rode’s annual accounting period ends on December 31. Reversing entries are used by Rode.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Lease Agreement

The lease agreement refers to the lessor's and lessees’ actual contract, as expressed in their language or inferred from other factors such as the course of dealing, usage of trade, or course of performance.

02

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
5/01/2017	Leased Equipment	91,000.00
	Lease Liability		91,000.00
5/01/2017	Lease Liability	21,227.65
	Cash		21,227.65
12/31/17	Interest Expense	4,651.49
	Interest Payable		4,651.49
12/31/17	Depreciation Expense	6,066.67
	Accumulated Depreciation Capital Leases		6,066.67

Working notes:

Calculation of Interest Payable

$\begin{array}{c}\text{Interest\hspace{0.17em}payable}=\text{Interest\hspace{0.17em}on\hspace{0.17em}liability}\times \text{total\hspace{0.17em}month}\\ =\mathrm{\$}6,977.24\times \frac{8}{12}\\ =\mathrm{\$}4,651.49\end{array}$

Calculation of Accumulated depreciation capital leases

$$\begin{gathered} \text{Accumulated\hspace{0.17em}depreciation}=\left(\frac{\text{Lease\hspace{0.17em}equipment}}{\text{Economic\hspace{0.17em}life\hspace{0.17em}of\hspace{0.17em}leased\hspace{0.17em}equipment}}\right)\times \text{Total\hspace{0.17em}month} \\ =\left(\frac{\mathrm{\$}91,000}{10}\right)\times \frac{8}{12} \\ =\mathrm{\$}9,100.00\times \frac{8}{12} \\ =\mathrm{\$}6,066.7 \end{gathered}$$

Date	Particular	Debit ($)	Credit ($)
1/1/18	Interest Payable	4,651.49
	Interest Expense		4,651.49
5/1/18	Interest Expense	6,977.24
	Lease Liability	14,250.41
	Cash		21,227.65
12/31/18	Interest Expense	3,701.46
	Interest Payable		3,701.46
12/31/18	Depreciation Expense	9,100.00
	Accumulated Depreciation Capital Leases		9,100.00

Working Notes:

Calculation of Interest payable

$\begin{array}{c}\text{Interest\hspace{0.17em}payable}=\text{Interest\hspace{0.17em}on\hspace{0.17em}liability}\times \text{total\hspace{0.17em}month}\\ =\mathrm{\$}5,552.19\times \frac{8}{12}\\ =\mathrm{\$}3,701.46\end{array}$

Calculation of Accumulated depreciation capital leases

$$\begin{gathered} \text{Accumulated\hspace{0.17em}depreciation}=\left(\frac{\text{Lease\hspace{0.17em}equipment}}{\text{Economic\hspace{0.17em}life\hspace{0.17em}of\hspace{0.17em}leased\hspace{0.17em}equipment}}\right) \\ =\left(\frac{\mathrm{\$}91,000}{10}\right) \\ =\mathrm{\$}9,100.00 \end{gathered}$$

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