Windsor Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 4 years and requires equal rental payments of $87,122 at the beginning of each year of the lease, starting on the commencement date (December 31, 2019). The equipment has a fair value at the commencement date of the lease of $320,000, an estimated useful life of 4 years, and no estimated residual value. The appropriate interest rate is 6%.

Prepare Windsor's 2019 and 2020 journal entries, assuming Windsor depreciates similar equipment it owns on astraight-line basis

The journal entries to prepare would be the following:

31/12/2019

Right of use assets $320,000

Lease liability $320,000

31/12/2019

Lease liability $ 87,122

Cash $87,122

31/12/2020

Lease liability $73,149

Interest Expense $13,973

Cash $87,122

31/12/2020

Amortization $80,000

Right of use assets $ 80,000

Explanation:

According to the given data, we first have to calculate the PV factor of annuity due for 4 years at 6% discount = 3.67301

Therefore, PV of annual lease payment = Lease liability = 3.67301 * 87122 = $320,000

Next, according to given data First lease payment on 31/12/2019 = $87,122

Hence, Lease liability as on (after first lease payment) 31/12/2019 = 320000 - 87122 = $232,878

So, the Interest expense for 2020 = 232,878 * 6% = $13,973 and the Amortization/depreciation per year = 320000 / 4 = $80,000

Therefore, the journal entries to prepare would be the following:

31/12/2019

Right of use assets $320,000

Lease liability $320,000

31/12/2019

Lease liability $ 87,122

Cash $87,122

31/12/2020

Lease liability $73,149

Interest Expense $13,973

Cash $87,122

31/12/2020

Amortization $80,000

Right of use assets $ 80,000