On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $412,184 and has an expected economic life of five years. Aqua expects the residual value at December 31, 2024, to be $50,000. Negotiations led to Maywood guaranteeing a $70,000 residual value. Equal payments under the lease are $100,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 5% interest rate when calculating lease payments.

Required:

1. Prepare the appropriate entry for Maywood on January 1, 2021, to record the lease.

2. Prepare all appropriate entries for Maywood on December 31, 2021, related to the lease.

Question

Aleah Norris

Business

4 April, 07:15

On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $412,184 and has an expected economic life of five years. Aqua expects the residual value at December 31, 2024, to be $50,000. Negotiations led to Maywood guaranteeing a $70,000 residual value. Equal payments under the lease are $100,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 5% interest rate when calculating lease payments.

Required:

1. Prepare the appropriate entry for Maywood on January 1, 2021, to record the lease.

2. Prepare all appropriate entries for Maywood on December 31, 2021, related to the lease.

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Answers (1)

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Dutchess · Answer 1

1/1/2021

Dr Right of use Asset 371,049

Dr Lease Payable 371,049

12/31/2021

Dr Interest Expense 18,552

Dr Lease Payable 81,448

Cr Cash 100,000

12/31/2021

Dr Amortization Expense 92,762

Cr Right of use Asset 92,762

Explanation:

Maywood Hydraulics

First step is to Calculate for PMT, FV and PV

N = 4, I = 5, PMT=100,000, FV=20,000, PV = 371,049

1/1/2021

Dr Right of use Asset 371,049

Dr Lease Payable 371,049

12/31/2021

Dr Interest Expense 18,552

(371,049*.05)

Dr Lease Payable 81,448

(100,000-18,552)

Cr Cash 100,000

12/31/2021

Dr Amortization Expense 92,762

Cr Right of use Asset 92,762

[ (371,049-0) / 4 years]