On 31 December 2000, Columbia
On 31 December 2000, Columbia Inc. entered into an agreementwith Scotia Ltd. to lease equipment with a useful life of 6 years.Columbia Inc. will make four equal payments of $134,000 at thebeginning of each lease year. Columbia Inc. anticipates that theequipment will have a residual value of $91,200 at the end of thelease, net of removal costs. Columbia Inc. has the option ofextending the lease by (1) paying $91,200 to retain the equipmentor (2) allowing Scotia Ltd. to remove it. Scotia Ltd.’s implicitinterest rate in this lease is 8%. Columbia Inc.’s incrementalborrowing rate is 9%. Columbia Inc. depreciates the leasedequipment on a straight-line basis. The lease commences on 1January 2001. Assume that the fair value of the equipment on theopen market is greater than the present value of the leasepayments. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriatefactor(s) from the tables provided.)
Required:
1. Prepare a lease liability amortization table for this leasefor Columbia Inc. (Round your final answers to the nearest wholedollar amount. Leave no cell blank. Be certain to enter “0”wherever required.)
2. Prepare all entries that Columbia Inc. will record for thislease for 2011 and 2012. (Round your intermediate calculations andfinal answers to the nearest whole dollar amount. If no entry isrequired for a transaction/event, select “No journal entryrequired” in the first account field.)
Answer:
1. Lease amortization table is below.
| Year | Lease liability balance at thebeginning of the year (A) | Interest expense for PY (Leaseliability o/s*9%) (B) | Yearly payment (‘C) | Liability at the end of year(A+B-C) | Priciple portion (C-B) |
| 1 | $ 4,73,193 | $ – | $ 1,34,000 | $ 3,39,193 | $ 1,34,000 |
| 2 | $ 3,39,193 | $ 30,527 | $ 1,34,000 | $ 2,35,721 | $ 1,03,473 |
| 3 | $ 2,35,721 | $ 21,215 | $ 1,34,000 | $ 1,22,936 | $ 1,12,785 |
| 4 | $ 1,22,936 | $ 11,064 | $ 1,34,000 | $ – | $ 1,22,936 |
Note: Calculation of Lease liability
| Year | Payments | Discount factor @9%(1/(1+9%)^n) | Present value of payments |
| 0 | $ 1,34,000.00 | 1.0000 | $ 1,34,000 |
| 1 | $ 1,34,000.00 | 0.9174 | $ 1,22,936 |
| 2 | $ 1,34,000.00 | 0.8417 | $ 1,12,785 |
| 3 | $ 1,34,000.00 | 0.7722 | $ 1,03,473 |
| $ 5,36,000.00 | $ 4,73,193 |
2. Journal entries in the books of columbia for the year 2001and 2002.
| Date | Accounttittle | Debit | Credit |
| Jan 1,2001 | Right to use | $ 4,73,193 | |
| Lease liability | $ 4,73,193 | ||
| Jan 1,2001 | Lease liability | $ 1,34,000 | |
| Cash | $ 1,34,000 | ||
| Dec 31, 2001 | Depreciation | $ 1,18,298.37 | |
| Accmulated depreciation | $ 1,18,298 | ||
| Dec 31, 2001 | Interest expense | $ 30,527 | |
| Accrued interest | $ 30,527 | ||
| Jan 1,2002 | Lease liability | $ 1,03,473 | |
| Accrued interest | $ 30,527 | ||
| Cash | $ 1,34,000 | ||
| Dec 31, 2002 | Depreciation | $ 1,18,298.37 | |
| Accmulated depreciation | $ 1,18,298 | ||
| Dec 31, 2002 | Interest expense | $ 21,215 | |
| Accrued interest | $ 21,215 |
Depreciation calculation
Depreciation per year = $4,73,193/4 = $118,298
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