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montana company signs a five year capital lease with elway company for office equipm 648106

Montana Company signs a five year capital lease with Elway Company for office equipment. The annual lease payment is $20,000, and the interest rate is 8%.

Required

1. Compute the present value of Montana’s five year lease payments.

2. Prepare the journal entry to record Montana’s capital lease at its inception.

3. Complete a lease payment schedule for the five years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is $79,854. (Hint: To find the amount allocated to interest in year 1, multiply the interest rate by the beginning of year lease liability. The amount of the annual lease payment not allocated to interest is allocated to principal. Reduce the lease liability  by the amount allocated to principal to update the lease liability at each year end.)

Period
Ending
Date

Beginning
Balance of
Lease
Liability

Interest on
Lease
Liability

Reduction of
Lease
Liability

Cash
Lease
Payment

Ending
Balance of
Lease
Liability

           
           
           

4. Use straight line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five year life for the office equipment.

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