Chapter 14, Problem 12AP

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. 1. Prepare the January 1 journal entry at the start of the lease to record any asset or liability.
2. 2. Prepare the January 1 journal entry to record the first $18,000 cash lease payment.
3. 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. 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.

To determine

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.

To determine

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.

To determine

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.

To determine

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.

To determine

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.

To determine

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.

To determine

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.