The nature of the lease arrangement is that of a finance lease. the following journal entries will be passed in the books of accounts:
<u>Explanation:</u>
a. This is because Sharrer Corporation (the lesse) will assume the risks of normal ownership. Maintenance is also not provided by the lessor.
Mike Macinski should, thus, use direct financing lease method. Lease receivable will be $95,000 and interest will be recognized annually.
b. Present value interest factor of annuity for 9% and 3 years = 2.531 (from PVIFA tables)
Annual payment will be = 95,000 by 2.531 = $37,534.57
Interest will be calculated on the opening balance of principal, at the rate of 9%. Thus, interest for the 1st year will be = 95,000 into 0.09 = $8550.
Principal paud during the year = total amount paid - interest amount. closing principal amount = opening principal - principal amount paid.
Period Cash due Interest Principal Balance
0 95,000.00
1 37,534.57 8,550.00 28,984.57 66,015.43
2 37,534.57 5,941.39 31,593.18 34,422.25
3 37,534.57 3,112.33 34,422.25 0.00
c. <u>Entry for the signing of the lease agreement:
</u>
Fixed assets account (Dr) 95,000
Lease Payable account (Cr) 95,000
Entry on 31st December 2014:
Lease payable account (Dr) 28984.57
Interest account (Dr) 8550
Cash (Cr) 37534.57
<u>
Entry on 31st december 2015</u>:
Lease payable account (Dr) 31593.18
Interest account (Dr) 5941.39
Cash (Cr) 37534.57
<u>
Entry on 31st december 2016:
</u>
Lease payable account (Dr) 34422.25
Interest account (Dr) 3112.33
Cash (Cr) 37534.57
