A lessor and lessee enter into a lease agreement whereby an 18 wheeler with a fair value of $130,000 and a useful life of five years will be leased for a period of four years. The lease payments will be made at the beginning of each year. The residual value at the end of the lease term is expected to be $20,000. The residual value at the end of the asset's useful life is expected to be $15,000. At the end of two years the lessee has the option to purchase the truck for 65,000. The fair market value of the truck at that time is estimated to be 90,000. The lessor requires a rate of return of 12% on his net investment. The lessee can borrow to purchase the truck at a 10% interest rate. The lessee knows the lessors implicit rate.

For the lessee,

1. The capitalized value of the lease is $_____________________. SHOW YOUR WORK

2. The beginning carrying value of the liability is $_____________________. SHOW YOUR WORK

3. The interest rate to calculate interest is ______________________. SHOW YOUR WORK

4. Make the journal entries for the first year of the lease term.

LEASED TRUCK

CASH

LEASE LIABILITY

INTEREST EXPENSE

INTEREST PAYABLE

AMORTIZATION EXPENSE

ACCUM AMORTIZATION

5. Make all lessee journal entries for the rest of the lease term.