Waterworld Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 4 years and requires equal rental payments of $41,933 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 $150,000, an estimated useful life of 4 years, and no estimated residual value. The appropriate interest rate is 8%.

Required:
Prepare Waterworld's 2016 and 2017 journal entries, assuming Waterworld depreciates similar equipment it owns on a straight-line basis.

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2021-11-26T13:00:10+01:00

The appropriate journal entries for 2016 and 2017 assuming Waterworld depreciates similar equipment it owns on a straight-line basis are:

Waterworld Company Journal entries

12/31/16

Debit Right-of-Use Asset $150,000

Credit Lease liability $150,000

[To record lease liability]

12/31/16

Debit Lease liability $41,933

Credit Cash $41,933

[To record lease payment]

12/31/17

Debit Interest expense $8,645.36

[($150,000-$41,933) x 8%]

Debit Lease liability $33,287.64

($41,933-$8,645.36)

Credit Cash $41,933

[To record interest expense]

12/31/17

Debit Amortization expense $37,500

[$150,000/4 years]

Credit Right-of-Use asset $37,500

[To record amortization of the right-of-use asset]

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