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30 March, 01:00

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)
  1. 30 March, 01:48
    0
    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]
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