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On January 3, 2020, Hanna Corporation signed a lease on a machine for its manufacturing operation and the lease commences on the same date. The lease requires Hanna to make six annual lease payments of $12,000 with the first payment due December 31,2020. Hanna could have financed the machine by borrowing the purchase price at an interest rate of 7%. a. Prepare the journal entries that Hanna Corporation would make on January 3 and December 31, 2020, to record this lease assuming. i. the lease is reported as an operating lease. ii. the lease is reported as a finance lease. b. Post the journal entries of part a to the appropriate T-accounts. c. Show how the entries posted in part b would affect the financial statements using the financial statement effects template.

Sagot :

Answer:

Hanna Corporation

a. Journal entries that Hanna Corporation would make on January 3 and December 31, 2020 to record this lease assuming:

i. the lease is reported as an operating lease:

January 3, 2020: No journal entry

December 31, 2020:

Debit Lease Expense $12,000

Credit Cash $12,000

To record the payment for the operating lease.

ii. the lease is reported as a finance lease:

January 3, 2020:

Debit Right to Use Asset $57,198.48

Credit Lease Liability $57,198.48

To recognize the right to the leased asset and establish the related liability.

December 31, 2020:

Debit Lease Liability $7,996,11

Debit Interest Expense $4,003.89

Credit Cash $12,000

To record the payment for the lease liability and interest expense.

b. T-accounts;

Operating lease:

Cash Account

Date                  Account Titles     Debit      Credit

Dec. 31, 2020   Lease Expense                $12,000

Lease Expense

Date                  Account Titles     Debit      Credit

Dec. 31, 2020   Cash                 $12,000

Finance Lease:

Right to Use Asset

Date                  Account Titles     Debit      Credit

Jan. 3, 2020     Lease Liability   $57,198.48

Lease Liability

Date                  Account Titles        Debit      Credit

Jan. 3, 2020     Right to Use Asset              $57,198.48

Dec. 31, 2020   Cash                   $7,996.11

Cash Account

Date                  Account Titles     Debit      Credit

Dec. 31, 2020   Lease Liability                $7,996.11

                         Interest Expense          $4,003.89

Interest Expense

Date                  Account Titles     Debit      Credit

Dec. 31, 2020   Cash            $4,003.89

c. Financial Statement Effects:

              Balance Sheet                Income Statement           Statement of

Assets  = Liabilities + Equity  Revenue-Expenses=Profit                                                                                            

a. Cash -$12,000

= Liabilities + Equity (Retained               -$12,000        Operating activity

   Earnings - $12,000)                                                    $12,000

b. Assets +$57,198.48

= Liabilities +$57,198.48

Cash -$12,000

= Liabilities -$7,996,11 + Equity        -$4,003.89               Operating activity

(Retained earnings -$4,003.89)                                        $4,003.89

Explanation:

a) Data and Calculations:

Lease for a manufacturing machine:

Annual lease payment = $12,000

Lease period = 6 years

Lease date = January 3, 2020

First payment date = December 31, 2020

Relevant interest rate = 7%

From an online financial calculator:

N (# of periods)  6

I/Y (Interest per year)  7

PMT (Periodic Payment)  12000

FV (Future Value)  0

Results

PV = $57,198.48

Sum of all periodic payments $72,000.00

Total Interest $14,801.52

Payment Schedule

Period      PV                   PMT           Interest          FV

1 $57,198.48 $12,000.00 $4,003.89 $49,202.37

2 $49,202.37 $12,000.00 $3,444.17 $40,646.54

3 $40,646.54 $12,000.00 $2,845.26 $31,491.79

4 $31,491.79 $12,000.00 $2,204.43 $21,696.22

5 $21,696.22 $12,000.00 $1,518.74         $11,214.95

6 $11,214.95 $12,000.00 $785.05         $0.00