Gambet Labs entered into a lease agreement on January 1,20X3,to use an x-ray machine.The machine has a useful life of 6 years.Gambet Labs will make annual lease payments of $13,000 for 6 years,beginning on December 31,20X3.Assume a 14% interest rate.Using the present value tables,what is the journal entry to be made by Gambet Labs on December 31,20X4,to amortize the leased asset,assuming straight-line amortization is used?
A)No journal entry is necessary.
B)$\begin{array} { l l l }
\text { Leasehold Amertization Expense } & 4,575 & \
\text { Machine Leasehold } & & 4,575 \
\end{array}$

C)$\begin{array}{lccc}
\text { Leasehold Amortization Expense } & \text { 8,426 } & \
\text { Machine Leasehold } & & \text { 1,426 } \
\end{array}$

D)$\begin{array}{lccc}
\text { Leasehold Amortization Expense } & 13,000 & \
\quad \text { Machine Leasehold } & & 13,000 \
\end{array}$

E)$\begin{array}{lccc}
\text { Leasehold Amortization Expense } & 13,000 & \
\text { Capital Lease Liability } & & 13,000
\end{array}$

Question

Gambet Labs entered into a lease agreement on January 1,20X3,to use an x-ray machine.The machine has a useful life of 6 years.Gambet Labs will make annual lease payments of $13,000 for 6 years,beginning on December 31,20X3.Assume a 14% interest rate.Using the present value tables,what is the journal entry to be made by Gambet Labs on December 31,20X4,to amortize the leased asset,assuming straight-line amortization is used?
A)No journal entry is necessary. 
B)$\begin{array} { l l l } 
\text {  Leasehold Amertization Expense } & 4,575 & \
\text { Machine Leasehold } & & 4,575 \
\end{array}$

C)$\begin{array}{lccc}
\text {  Leasehold Amortization Expense } & \text { 8,426 } & \
\text { Machine Leasehold } & & \text { 1,426 } \
\end{array}$

D)$\begin{array}{lccc}
\text {  Leasehold Amortization Expense } & 13,000 & \
\quad \text { Machine Leasehold } & & 13,000 \
\end{array}$

E)$\begin{array}{lccc}
\text {  Leasehold Amortization Expense } & 13,000 & \
\text { Capital Lease Liability } & & 13,000
\end{array}$

Quizplus · Accepted Answer

To calculate the leasehold amortization expense, we need to first calculate the present value of the lease payments as of January 1, 20X3. 
PV of lease payments = $13,000 x present value of an annuity due, n=6, i=14%
= $13,000 x 4.506
= $58,578

The leasehold asset is amortized over the lease term of 6 years using the straight-line method. 
Annual amortization expense = $58,578 / 6
= $9,763

For the year ended December 31, 20X4, the leasehold amortization expense would be $9,763. Therefore, the journal entry would be:
Leasehold Amortization Expense            8,426
  Machine Leasehold                                 1,337
  (To record annual depreciation on leased x-ray machine)