I. Leases On January 1, 2020, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cages incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 5 years and no residual value. Instructions: (a) Prepare the journal entry or entries that Cage should record on January 1, 2020. (Show two separate entries. One for recording the leased asset and one to record the initial payment). (b) Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2020. Include an amortization schedule. (c) Prepare the journal entry to record the lease payment of January 1, 2021, assuming reversing entries are not made. (The assumption referenced in this question means that there was no initial accrual of the interest expense with a corresponding credit to interest payable. Therefore, there would be no reversing entry made at the time of payment (i.e. no debit to interest payable to reverse the accrual). So, what accounts would be affected when this journal entry is made assuming these facts?) (d) What amounts will appear on the lessees December 31, 2020 balance sheet relative to the lease contract?

1 3% 4% 5% 6% TABLE 6.2 Present Value of 1 (Present Value of a Single Sum) PVFn,i = - (1 + i)-" (1+i)" (n) Periods 2% 212% 1 .98039 .97561 .97087 .96154 .96117 .94260 .92456 3 .94232 .92860 .91514 .88900 4 .92385 .90595 .88849 .85480 5 .90573 .88385 .86261 .82193 2 .95181 .95238 .90703 .86384 .82270 .78353 .94340 .89000 .83962 .79209 .74726 6 .79031 7 8 .88797 .87056 .85349 .83676 .82035 .86230 .84127 .82075 .80073 .78120 .83748 .81309 .78941 .76642 .74409 .75992 .73069 .70259 .67556 .74622 .71068 .67684 .64461 .61391 .70496 .66506 .62741 .59190 -55839 9 10 11 12 13 .80426 .78849 .77303 -75788 .74301 .76214 -74356 .72542 -70773 .69047 .72242 .70138 .68095 .66112 .64186 .64958 .62460 .60057 -57748 -55526 -58468 -55684 .53032 -50507 .48102 -52679 .49697 .46884 .44230 41727 14 15 Debit Credit 12 (a) 13 Jan. 1 Use the present value tables in Chapter 6 (make sure to use the correct table!) Use the full present value factor (with all decimals) Right of Use Asset Lease Liability (To record the leased asset.) 14 15 16 17 Jan. 1 18 19 20 Lease Liability Cash (To record initial payment. ) 21 Debit Credit Dec. 31 Amortization Expense Right of Use Asset (To record amortization.) 22 23 (b) 24 25 26 27 28 29 30 31 Dec. 31 Interest Expense Lease Liability (To record interest expense.) Debit Credit 33 (c) 34 35 Jan. 1 2021 Lease Liability Cash (To record lease payment on Jan. 1 2021) 36 37 38 39 AMORTIZATION SCHEDULE Annual Lease Payment Reduction of Lease Liability Balance of Lease Liability You need to use formulas and cell references in the amortization schedule or your number may not agree to the grading schedule. 40 Interest (5%) on Liability 41 42 43 44 45 46 47 Date 01/01/20 01/01/20 01/01/21 01/01/22 01/01/23 01/01/24 $ $ $ F G A B D E 50 51 (d) What amounts will appear on the lessee's balance sheet at December 31, 2020? 52 53 54 Current liabilities: 55 Lease liability 56 Long-term liabilities: 57 Lease liability 58 59 Non-current assets: 60 Right-of-use asset 61 62 63 64 65