Teal Mountain Company leased equipment from Costner Company, beginning on December 31, 2019. The lease term is 8 years and requires equal rental payments of $54,782 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 $340,000, an estimated useful life of 8 years, and no estimated residual value. The appropriate interest rate is 8%. Click here to view factor tables. Prepare Teal Mountain’s 2019 and 2020 journal entries, assuming Teal Mountain depreciates similar equipment it owns on a straight-line basis

See the explanation below.

Explanation:

Date                Details                                    Dr ($)            Cr ($)        .

31 Dec. '19      Leased equipment             340,000

                       Lease liability                                              340,000

                       To record liability form equipment lease.                   .

31 Dec. '19      Leased liability                       54,782

                       Cash                                                              54,782

                       To record lease payment.                                            .

31 Dec. '20     Interest expense                 22,817.44  

                       Lease liability                      31,964.56

                       Cash                                                                54,782

                       To record interest expense and lease payment.            .

31 Dec. '20      Depreciation expense           42,500

                       Accumulated depreciation - lease               42,500

                       To record right-of -use equipment amortization              .

Note:

31 Dec. '20 Interest expense = (340,000 -  54,782) * 8% = $22,817.44  

31 Dec. '20 Lease liability = $54,782 - $22,817.44 = $31,964.56

31 Dec. '20 Depreciation expense = 340,000 / 8 = $42,500

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