Hughey Co. as lessee records a capital lease of machinery on January 1, 2011. 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. Hughey uses the effective-interest method of amortization and sum-of-the-years'-digits depreciation (no residual value). Round to the nearest dollar. a) Prepare an amortization table for 2 011 and 2012.
b) Prepare all of Hughey's journal entries for 2011.

Both requirements are solved below

Explanation:

An amortization table can be made as follows

DATA

Lease term = 7years

annual lease payments = $350,0000

Present value of the leases payment = $1,704,000

Implicit interest rate = 10%

Requirement A Amortization table for 2011 and 2012

Date   Annual payment  Effective    decreased      Balance

                                          interest        liability                                                                                                                     $1,704,000

12/31/11      $350,000      $170,400     $179,600     $1524,400

12/31/12      $350,000     $152,440     $197,560     $1,326,840

Requirement B journal entries for 2011

January 1  

Entry

                                      DEBIT           CREDIT

Leased machinery     $1,704,000

Lease liability                                   $1,704,000

December 31

Entry

                                      DEBIT           CREDIT

Interest expense       $170,400

Lease liability             $179,600

Cash                                                  $350,000

December 31

Entry

                                                   DEBIT           CREDIT

Depreciation expense(w)         $426,000

Accumulated depreciation                            $426,000

Working

Sum of the years =  (7+6+5+4+3+2+1)    = 28

Cost = $1,704,000

Residual value = $0

Estimated life = 7years

Depreciation expense = $1,704,000 x 7/28

Depreciation expense = $426,000

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