2. Gramwell International Ltd leased equipment from Lubsal Financial Group Ltd. The details are as follows:

Start of Lease	April 1, 2021
Lease term (non cancellable)	5 years
Annual lease payment due at the end of each year beginning April 1, 2021	$142,500
Fair value of asset at April 1, 2021	$650,000
Economic life of leased equipment	7 years
Residual value of equipment at end of lease term, unguaranteed by the lessee	$126,350
Lessees incremental borrowing rate	8%

The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line depreciation method for all equipment.

(Round all figures to the nearest $1.)

i) Calculate the lease liability for Gramwell International Ltd.

ii) Prepare the journal entries for Gramwell International Ltd at the start of the lease on April 1, 2021.

iii) Prepare the lease journal entries for Gramwell International Ltd for the year ended December 31, 2021.

iv) Prepare the amortization schedule and calculate the total interest for the 5-year lease term?

i)

Lease Liability = PV of lease payments

N	Answer
IY	Answer
PMT	Answer
FV	Answer
PV	Answer

ii) April 1, 2021

DR AnswerRight of Use AssetEquipmentPurchases	Answer
	CR AnswerLease liabilitySalesBank	Answer

iii)December 31, 2021

Interest Expense

DR AnswerLease liabilityEquipmentPurchases	Answer
DR AnswerInterest ExpenseInterest PayableAccounts Receivable	Answer
	Accounts Payable	Answer

Depreciation Expense

DR AnswerDepreciation ExpenseLease liabilityRight of Use Asset	Answer
	CR AnswerAcc. DepreciationSalesLease liability	Answer

iv) Schedule

Period	Lease liability (A)	Lease Payment (B)	Interest (C)	Decrease in lease liability (D)	Lease Liability c/f (E)
1	Answer	$142500	Answer	Answer	Answer
2	Answer	$142500	Answer	Answer	Answer
3	Answer	Answer	Answer	Answer	Answer
4	Answer	Answer	Answer	Answer	Answer
5	Answer	Answer	Answer	Answer	$0