1. On January 2, 2013, Gold Star Leasing Company leases equipment to Brick Co.

with 5
equal annual payments of $80,000 each, payable beginning December 31, 2013. Brick
Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease
term. Bricks incremental borrowing rate is 10%, however it knows that Gold Stars
implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2013
assuming this is a directfinancing lease?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092

a. Lease Receivable 450,000

Equipment 450,000
b. Lease Receivable 319,416
Loss 130,584
Equipment 450,000
c. Lease Receivable 334,310
Equipment 334,310
d. Lease Receivable 353,671
Equipment 353,671

2. Mays Company has a machine with a cost of $600,000 which also is its fair value on the
date the machine is leased to Park Company. The lease is for 6 years and the machine
is estimated to have an unguaranteed residual value of $60,000. If the lessor's interest
rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be
a. $138,541.
b. $123,698.
c. $117,270.
3. On January 2, 2013, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of $80,000 each, payable beginning December 31, 2013. Brick
Co. agrees to guarantee the $50,000 residual value of the asset at the end of the
lease term. Bricks incremental borrowing rate is 10%, however it knows that Gold
Stars implicit interest rate is 8%. What journal entry would Brick Co. make at
December 31, 2013 to record the first lease payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092

a. Lease Liability 80,000

Cash 80,000
b. Lease Liability 51,706
Interest Expense 28,294
Cash 80,000
c. Lease Liability 46,570
Interest Expense 33,430
Cash 80,000
d. Lease Liability 16,570
Interest Expense 33,430
Cash 50,000