On January 1, 2021, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $17,500 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $105,000 and were expected to have a useful life of six years with no residual value. Both firms record amortization and depreciation semiannually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

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08-10-2021
Business

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On January 1, 2021, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $17,500 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $105,000 and were expected to have a useful life of six years with no residual value. Both firms record amortization and depreciation semiannually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2021-10-16T05:53:03+02:00

If on January 1, 2021, Nath-Langstrom Services, Inc., a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The appropriate journal entries recorded by Nath-Langstrom Services and ComputerWorld Leasing for the first year of the lease are:

First step is to determine the present value using this formula

Present value of lease payment=P[1-(1+r)^-n/r]

Where:

Payment(p)=$17,500

Rate of interest(r)=4%

Semi annual interest rate=4%/2=2%

Number of payment period(n)=4years

Let plug in the formula

Present value of lease payment=$17,500[1-(1+2%)^-4/2%]

Present value of lease payment=$17,500[1-(1.02)-^4/0.02%]

Present value of lease payment=$17,500×3.8077

Present value of lease payment=$66,634.75

Second step is to prepare the Amortization schedule

Date Payment Interest at 2% Decrease in balance Outstanding balance

1/1/2021 - - - $66,634.75

6/30/2021 $17,500 $1,332.695 $16,167.305 $50,467.445

12/31/2021 $17,500 $1,009.3489 $16,490.6511 $33,976.7939

6/30/2022 $17,500 $679.535878 $16,820.4641 $17,156

12/31/2022 $17,500 $343.12659 $17,156 $0

Interest at 2% on outstanding balance

6/30/2021 $66,634.75×2%=$1,332.695

12/31/2021 $50,467.445×2%=$1,009.3489

6/30/2022 $33,976.7939×2%=$679.535878

12/31/2022 $17,153×2%=$343.12659556

Decrease in balance

6/30/2021 $17,500-$1,332.695=$16,167.305

12/31/2021 $17,500-$1,009.3489=$16,490.6511

6/30/2022 $17,500-$679.535878=$16,820.464

12/31/2022 %17,500-$343.126595=$17,156

Outstanding balance

6/30/2021 $66,634.37-$16,167.305=$50,467.445

12/31/2021 $50,467.445-$16,490.6511=$33,976.7939

6/30/2022 $16,820.464122-$33,974.05=$17,156.329778

12/31/2022 $17,156-$17,156=$0

1) Preparation of the appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease

Jan 1, 2021

Dr Right of use asset $66,634.37

Cr Lease payable $66,634.37

June 30

Dr Interest expense $1,009.3489

Dr Lease payable $16,490.6511

Cr Cash $17,500

Dr Amortization expense $16,490.6511

Cr Right to use assets $16,490.6511

Dec 31

Dr Interest expense $1,332.695

Dr Lease payable $16,167.305

Cr Cash $17,500

Dr Amortization expense $16,167.305

Cr Right to use assets $16,167.305

2. Preparation of the appropriate journal entries recorded by ComputerWorld Leasing for the first year of the lease

June 30, 2021

Dr Cash $17,500

Cr Lease revenue $17,500

Dr Depreciation expense $8,750

Cr Accumulated depreciation $8,750

[($105,000/6 years)/2]