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Refer to the lease details in Problem 14-11A. Assume that this lease is classified as an operating lease instead of a finance lease.
Required
- 1. Prepare the January 1
journal entry at the start of the lease to record any asset or liability. - 2. Prepare the January 1 journal entry to record the first $18,000 cash lease payment.
- 3. Prepare the December 31 journal entry to record amortization at the end of (a) Year 1, (b) Year 2, and (c) Year 3.
- 4. Prepare the December 31 journal entry to record the $18,000 cash lease payment at the end of (a) Year 1 and (b) Year 2.
1.
Prepare the journal entry at the start of the lease to record any asset or liability.
Explanation of Solution
Lease: It is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Operating leases: In an operating lease lessor retains all ownership risks and responsibilities.
Prepare the journal entry at the start of the lease to record any asset or liability.
| Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
| January 1 | Right-of- use Asset | 51,000 | ||
| Lease Liability | 51,000 | |||
| (To record the right of use asset and lease liability) |
Table (1)
Description:
- Right to use asset is an intangible asset and it is increased by $51,000. Therefore, it is debited by $51,000.
- Lease Liability is a liability and it is increased by $51,000. Therefore, it is credited by $51,000.
2.
Prepare the journal entry to record the first $18,000 cash lease payment.
Explanation of Solution
Lease: It is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Operating leases: In an operating lease lessor retains all ownership risks and responsibilities.
Prepare the journal entry to record the first $18,000 cash lease payment.
| Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
| January 1 | Lease Liability | 18,000 | ||
| Cash | 18,000 | |||
| (To record the first payment of lease for cash) |
Table (2)
Description:
- Lease Liability is a liability and it is decreased by $18,000. Therefore, it is debited by $18,000.
- Cash is an asset and it is decreased by $18,000. Therefore, it is credited by $18,000.
3. (a)
Prepare the journal entry to record straight-line amortization with zero salvage value at the end of (a) Year 1.
Explanation of Solution
Lease: It is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Operating lease: In an operating lease lessor retains all ownership risks and responsibilities.
Prepare the journal entry to record the straight-line amortization for Year 1.
| Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
| (a) | ||||
| Year 1 | ||||
| December 31 | Amortization expense | 16,019 | ||
| Accumulated amortization – Right of use asset | 16,019 | |||
| (To record the amortization on right of use asset) |
Table (3)
December 31, Year 1: To record the amortization on right of use asset:
- Amortization expense (expense account) is a component of stockholders’ equity and it is increased by $16,019. Therefore, it is debited by $16,109.
- Accumulated amortization is a contra-asset account and it is increased by $16,019. Therefore, it is credited by $16,019.
3. (b)
Prepare the journal entry to record the straight-line amortization for Year 2.
Explanation of Solution
Lease: It is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Operating lease: In an operating lease lessor retains all ownership risks and responsibilities.
Prepare the journal entry to record the straight-line amortization for Year 2.
| Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
| Year 2 | ||||
| December 31 | Amortization expense | 16,981 | ||
| Accumulated amortization – Right of use asset | 16,981 | |||
| (To record the amortization on right of use asset) |
Table (4)
December 31, Year 2: To record the amortization on right of use asset:
- Amortization expense (expense account) is a component of stockholders’ equity and it is increased by $16,981. Therefore, it is debited by $16,981.
- Accumulated amortization is a contra-asset account and it is increased by $16,981. Therefore, it is credited by $16,981.
3. (c)
Prepare the journal entry to record the straight-line amortization for Year 3.
Explanation of Solution
Lease: It is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Operating lease: In an operating lease lessor retains all ownership risks and responsibilities.
Prepare the journal entry to record the straight-line amortization for Year 3.
| Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
| Year 3 | ||||
| December 31 | Amortization expense | 18,000 | ||
| Accumulated amortization – Right of use asset | 18,000 | |||
| (To record the amortization on right of use asset) |
Table (5)
December 31, Year 3: To record the amortization on right of use asset:
- Amortization expense (expense account) is a component of stockholders’ equity and it is increased by $18,000. Therefore, it is debited by $18,000.
- Accumulated amortization is a contra-asset account and it is increased by $18,000. Therefore, it is credited by $18,000.
4. (a)
Prepare the journal entry to record the lease payment for interest and lease liability for Year 1.
Explanation of Solution
Lease: It is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Operating lease: In an operating lease lessor retains all ownership risks and responsibilities.
Prepare the journal entry to record lease payment for interest and lease liability.
| Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
| Year 1 | ||||
| December 31 | Interest expense | 1,981 | ||
| Lease liability | 16,019 | |||
| Cash | 18,000 | |||
| (To record the lease payment for interest and lease liability) |
Table (6)
December 31, Year 1: To record the lease payment for interest and lease liability:
- Interest expense (expense account) is a component of stockholders’ equity and it is increased by $1,981. Therefore, it is debited by $1,981.
- Lease Liability is a liability and it is decreased by $16,019. Therefore, it is debited by $16,019.
- Accumulated amortization is a contra-asset account and it is increased by $18,000. Therefore, it is credited by $18,000.
4. (b)
Prepare the journal entry to record the lease payment for interest and lease liability for Year 2.
Explanation of Solution
Lease: It is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
Operating lease: In an operating lease lessor retains all ownership risks and responsibilities.
Prepare the journal entry to record lease payment for interest and lease liability.
| Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
| Year 2 | ||||
| December 31 | Interest expense | 1,019 | ||
| Lease liability | 16,981 | |||
| Cash | 18,000 | |||
| ((To record the lease payment for interest and lease liability) |
Table (7)
December 31, Year 2: To record the lease payment for interest and lease liability:
- Interest expense (expense account) is a component of stockholders’ equity and it is increased by $1,091. Therefore, it is debited by $1,091.
- Lease Liability is a liability and it is decreased by $16,981. Therefore, it is debited by $16,981.
- Accumulated amortization is a contra-asset account and it is increased by $18,000. Therefore, it is credited by $18,000.
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Chapter 14 Solutions
Principles of Financial Accounting.
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