Python Company leased equipment from Hope Leasing on January 1, 2006. Hope purchased the equipment at a cost of $232,666.

Other information:

Lease term 3 years
Annual payments $90,000 on January 1 each year
Life of asset 3 years
Fair value of asset $232,666
Implicit interest rate 8%
Incremental rate 8%

There is no expected residual value.

Required:
Prepare appropriate journal entries for Python for 2006. Assume straight-line depreciation and a December 31 year-end.

Answer:
January 1, 2006:

December 31, 2006:

Python Company definitely made some fin-tastic transactions in 2006, leasing equipment from Hope Leasing. Let's dive into the journal entries for that year!

January 1, 2006:

Equipment (leased) - $232,666
Lease payable (Hope Leasing) - $232,666

Note: The initial cost of the equipment is recorded as the lease payable. It's gonna be a hoot working with this equipment!

December 31, 2006:

Depreciation expense - $77,555.33
Accumulated depreciation - $77,555.33

Note: Since the lease term is 3 years and we're using straight-line depreciation, we divide the initial cost ($232,666) by 3 to get $77,555.33. We record the amount as depreciation expense and accumulate it in the accumulated depreciation account. Equipment might not appreciate our jokes, but they still depreciate!

Lease payable (Hope Leasing) - $45,931.79
Interest expense - $45,931.79

Note: We calculate the interest expense by multiplying the lease payable at the beginning of the year ($232,666) by the incremental interest rate (8%). What a thrilling interest rate!

Lease payable (Hope Leasing) - $44,068.21
Cash - $44,068.21

Note: The annual payment is made on January 1 of each year, so we record the cash payment made to Hope Leasing. Let's keep the cash flowing!

And that's a wrap for Python's journal entries in 2006! Stay tuned for more accounting adventures!

To record the lease and initial recognition of the equipment:

1. Debit: Leased Equipment $232,666
Credit: Lease Liability $232,666

To record the annual lease payment for 2006:

2. Debit: Lease Liability $90,000
Credit: Cash $90,000

To record the depreciation expense for 2006:

3. Debit: Depreciation Expense $77,555 ([$232,666 / 3] x 1)
Credit: Accumulated Depreciation - Leased Equipment $77,555

To record the interest expense on the lease liability for 2006:

4. Debit: Lease Interest Expense $16,554 ($232,666 x 8%)
Credit: Interest Payable $16,554

(Note: The interest expense is calculated using the implicit interest rate since it is lower than the incremental rate.)

To close out the interest payable at the end of the year:

5. Debit: Interest Payable $16,554
Credit: Cash $16,554

To prepare the journal entries for Python Company in 2006, we need to consider the lease payments, depreciation expense, and interest expense.

1. January 1, 2006: Python Company leased equipment from Hope Leasing.
Journal Entry:
Lease Equipment 232,666
Lease Liability 232,666

This entry records the capitalization of the lease as an asset and the related lease liability.

2. December 31, 2006: We need to record the depreciation expense and interest expense for the year.

Depreciation Expense:
Journal Entry:
Depreciation Expense $77,555 (($232,666 - $0) / 3 years)

This entry records the annual depreciation expense for the leased equipment. Since there is no expected residual value, we divide the cost of the equipment by its useful life of 3 years.

Interest Expense:
Journal Entry:
Interest Expense $18,613 ($232,666 * 8%)

This entry records the interest expense incurred on the lease liability.

3. We also need to record the lease payment made on January 1, 2006.

Lease Payment:
Journal Entry:
Lease Liability $90,000
Cash $90,000

This entry records the payment made by Python Company on the lease liability.

Please note that these are the journal entries for 2006. We would need additional journal entries for subsequent years based on the lease term and payment schedule.