The Balance Sheet of the Illini as of 12/31/20X0:
Assets
Current Assets:
Cash 1,500,000
Accounts receivable, net 18,000
Inventory 50,000
Total current assets 1,568,000
Equipment 90,000
Goodwill 20,000
Total assets $1,678,000
Liabilities and shareholders' equity
Shareholders' equity:
Common stock, 20,000 shares outstanding, $1 par 20,000
Additional paid-in capital 280,000
Retained earnings 1,378,000
Total shareholders' equity 1,678,000
Total liabilities and shareholders' equity 1,678,000
Note that all additional paid-in capital (APIC) sub
accounts (e.g., APIC-options and APIC-treasury stock),
if any, are tracked in the “Additional paid-in capital”
account on the Balance Sheet.
2.2 Part 1
For all the following lease transactions, if Illini needs to depreciate the leased equipment, use "depreciation expense." If the lease classification
is operating lease, use "rental expense" for all related expenses. Illini leases equipment from Cubs Corporation under a four-year lease
agreement on 1/1/20x1. The lease specifies annual payments of $36,000 on each 1/1 and beginning 1/1/20x1. The annual lease payment
includes a yearly $1,000 maintenance fee paid to Cubs for providing relevant maintenance services on the equipment. Illini has the option to
buy the equipment at the end of the lease term (i.e., 12/31/20x4) for $20,000 when the fair value of the equipment is expected to be $60,000.
The expected useful life of the equipment is five years with no residual value. The implicit rate is 10%.
Date Account Name Debit Credit
1/1/20x1 ROU assets [A]
Lease obligation [B]
1/1/20x1 Lease obligation [C]
Prepaid Maintenance [D]
Cash [E]
12/31/20x1 Maintenance expense [F]
Prepaid Maintenance [G]
12/31/20x1 Interest expense [H]
Accrued interest [I]
12/31/20x1 Depreciation expense [J]
ROU assets [K]
1/1/20x2 Lease obligation [L]
Accrued interest [M]
Prepaid Maintenance [N]
Cash [O]
12/31/20x2 Maintenance expense [P]
Prepaid Maintenance [Q]
12/31/20x2 Interest expense [R]
Accrued interest [S]
12/31/20x2 Depreciation expense [T]
ROU assets [U]
2.2 Part 2
Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual
payments on each 1/1 and the first payment of $10,000 is made on 1/1/20x1. The lease also specifies a 3% annual increase in the lease
payments. The equipment has a fair value of $100,000 on 1/1/20x1. The expected useful life of the equipment is 10 years with no residual
value. The equipment will be returned to Cubs at the end of the lease term. The implicit rate is 10%.
Date Account Name
Debi
t Credit
1/1/20x1 ROU assets [A]
Lease obligation [B]
1/1/20x1 Lease obligation [C]
1