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Windsor Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 4 years and requires equal rental payments of $87,122 at the beginning of each year of the lease, starting on the commencement date (December 31, 2019). The equipment has a fair value at the commencement date of the lease of $320,000, an estimated useful life of 4 years, and no estimated residual value. The appropriate interest rate is 6%.
Prepare Windsor’s 2019 and 2020 journal entries, assuming Windsor depreciates similar equipment it owns on astraight-line basis

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Answer:

The journal entries to prepare would be the following:

31/12/2019

Right of use assets      $320,000

                      Lease liability                    $320,000

31/12/2019

Lease liability       $ 87,122

                         Cash                       $87,122

31/12/2020

Lease liability      $73,149

Interest Expense $13,973

                        Cash                          $87,122

31/12/2020

Amortization          $80,000

                         Right of use assets   $ 80,000

Explanation:

According to the given data, we first have to calculate the PV factor of annuity due for 4 years at 6% discount = 3.67301

Therefore, PV of annual lease payment = Lease liability = 3.67301 * 87122 = $320,000

Next, according to given data First lease payment on 31/12/2019 = $87,122

Hence,Lease liability as on (after first lease payment) 31/12/2019 = 320000 - 87122 =$232,878

So, the Interest expense for 2020 = 232,878 * 6% = $13,973 and the Amortization/depreciation per year = 320000 / 4 = $80,000

Therefore, the journal entries to prepare would be the following:

31/12/2019

Right of use assets      $320,000

                      Lease liability                    $320,000

31/12/2019

Lease liability       $ 87,122

                         Cash                       $87,122

31/12/2020

Lease liability      $73,149

Interest Expense $13,973

                        Cash                          $87,122

31/12/2020

Amortization          $80,000

                         Right of use assets   $ 80,000

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