Windsor enters into an agreement with Traveler Inc. to lease a car on December 31, 2016. The following information relates to this agreement. 1. The term of the non-cancelable lease is 5 years with no renewal or bargain purchase option. The remaining economic life of the car is 3 years, and it is expected to have no residual value at the end of the lease term.
2. The fair value of the car was $12,840 at commencement of the lease.
3. Annual payments are required to be made on December 31 at the end of each year of the lease, beginning December 31, 2017. The first payment is to be of an amount of $4,753.20, with each payment increasing by a constant rate of 5% from the previous payment (i. e., the second payment will be $4,990.86 and the third and final payment will be $5,240.40).
4. Windsor’ incremental borrowing rate is 8%. The rate implicit in the lease is unknown.
5. Windsor uses straight-line depreciation for all similar cars.
(a) Prepare Windsor’ journal entries for 2016, 2017, and 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 2 decimal places, e. g. 5,275.25.)
Date
Account Titles and Explanation
Debit
Credit
12/31/16
12/31/17
(To record interest expense)
12/31/17
(To record amortization of the right-of-use asset)
12/31/18
(To record interest expense)
12/31/18
(To record amortization of the right-of-use asset)