Shapiro Inc. began operations in 2018 as a computer software service firm, with an accounting fiscal year ending August 31. Shapiro's primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system.
Shapiro has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of $40,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years.
All rentals are payable on the first day of the month beginning with August 1, 2019, the date the computer was installed and the lease agreement was signed. The lease is non-cancelable for its 12-year term, and it is secured only by the manufacturer's chattel lien on the Alpha-3 system.
This leased asset will be depreciated by the straight-line method. Borrowed funds for this type of transaction would cost Shapiro 6% per year (0.5% per month). Following is a schedule of the present value of an annuity due for selected periods discounted at 0.5% per period when payments are made at the beginning of each period.
Periods (months) Present Value of an Annuity Due Discounted at 0.5% per Period
1......................................................................................................1.000
2......................................................................................................1.995
3......................................................................................................2.985
143................................................................................................102.497
144................................................................................................102.987
Instructions
Prepare all entries Shapiro should make in its accounting records during August 2019 relating to this lease. Give full explanations and show supporting computations for each entry. Remember, August 31, 2019, is the end of Shapiro's fiscal accounting period, and it will be preparing financial statements on that date. Do not prepare closing entries.