Q.

Lessee’s Book (Velde):

This is a capital lease since the lease term is more than one year and also non-cancellable.

PV of Lease Liability: (A × PVIFADi,n) + (GRV × PVIFi,n);

where, A = Annual Lease Payment

PVIFADi,n = Present Value Interest Factor of Annuity Due

GRV = Guaranteed Residual Value

PVIFi,n = Present Value Interest Factor of Single Sum

So, PV of Lease Liability: (A × PVIFADi,n) + (GRV × PVIFi,n)

 PV = ($17,208 × PVIFAD10%,4)
 PV = ($17,208 × 3.48685)
 PV = $60,000 (approx.)

Amortization Schedule:

Date Annual Payment (A) Interest @10% Principal Balance

01.01.2010 $60,000
01.01.2010 $17,208 - $17,208 $42,792
01.01.2011 $17,208 $4,279 $12,929 $29,863
01.01.2012 $17,208 $2,986 $14,222 $15,641
01.01.2013 $17,208 $1,567 $15,641 0

Journal Entries:

01.01.2010 Leased Equipment A/c $60,000

Lease Liability $60,000

01.01.2010 Leased Liability A/c $17,208

Cash $17,208

31.12.2010 Interest Expense A/c $4,279

Interest Payable $4,279

31.12.2010 Depreciation Expense A/c $15,000 [$60,000/4]

Acc. Depreciation $15,000

01.01.2011 Lease Liability A/c $12,929

Interest Payable $4,279

Cash $17,208
31.12.2011 Interest Expense A/c $2,986

Interest Payable $2,986

31.12.2011 Depreciation Expense A/c $15,000 [$60,000/4]

Acc. Depreciation $15,000

01.01.2012 Lease Liability A/c $14,222

Interest Payable $2,986

Cash $17,208

31.12.2012 Interest Expense A/c $1,567

Interest Payable $1,567

31.12.2012 Depreciation Expense A/c $15,000 [$60,000/4]

Acc. Depreciation $15,000

01.01.2013 Lease Liability A/c $15,641

Interest Payable $1,567

Cash $17,208

31.12.2013 Depreciation Expense A/c $15,000 [$60,000/4]

Acc. Depreciation $15,000

31.12.2013 Acc. Depreciation A/c $60,000

Leased Equipment $60,000