Problem:
Howard Co. as lessee records a capital lease of machinery on January 1, 2010. The seven annual lease payments of $350,000 are made at the end of each year. The present value of the lease payments at 10% is $1,704,000. Howard is responsible to pay executory costs of $2,400 at the end of each year.
Howard uses the effective-interest method of amortization and calculated the depreciation for 2010 to be $430,000 for the period.
Use the following amortization schedule for 2010 and 2011 to answer parts (a) and (b) below (round to the nearest dollar)
Date: 1/01/2010
Annual Payment:
10% Interest:
Reduction of Liability:
Lease Liability: $1,704,000
Date: 12/31/2010
Annual Payment: $350,000
10% Interest: $170,400
Reduction of Liability: $179,600
Lease Liability: $1,524,400
Date: 12/31/2011
Annual Payment: $350,000
10% Interest: $152,440
Reduction of Liability: $197,560
Lease Liability: $1,326,840
Q1. Prepare all of Howard's journal entries for 2010 with descriptions and dates for this lease.
Q2. Prepare a partial balance sheet in regard to the lease for Howard's for December 31, 2010. The company uses the change in present value approach to classify the capital lease obligation between current and noncurrent.