Preston Company signs a five-year capital lease with Starbuck Company for office equipment. The annual lease payment is $10,000, and the interest rate is 10%.

Required
1. Compute the present value of Preston€™s lease payments.
2. Prepare the journal entry to record Preston€™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 $37,908.

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 officeequipment.

Transcribed Image Text:

Period Ending Date Beginning Balance of Lease Liability Interest on Lease Liability Reduction of Lease Liability Cash Lease Payment Ending Balance of Lease Liability