Principles of Financial Accounting.
Principles of Financial Accounting.
24th Edition
ISBN: 9781260158601
Author: Wild
Publisher: MCG
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Textbook Question
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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.

1.

Expert Solution
Check Mark
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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
January 1Right-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.

Expert Solution
Check Mark
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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
January 1Lease 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)

Expert Solution
Check Mark
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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
(a)     
Year 1    
December 31Amortization 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)

Expert Solution
Check Mark
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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
Year 2    
December 31Amortization 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)

Expert Solution
Check Mark
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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
Year 3    
December 31Amortization 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)

Expert Solution
Check Mark
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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
Year 1    
December 31Interest 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)

Expert Solution
Check Mark
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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
Year 2    
December 31Interest 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.

Ch. 14 - Prob. 6DQCh. 14 - Prob. 7DQCh. 14 - Prob. 8DQCh. 14 - Prob. 9DQCh. 14 - Prob. 10DQCh. 14 - Prob. 11DQCh. 14 - Prob. 12DQCh. 14 - Prob. 13DQCh. 14 - Prob. 14DQCh. 14 - Prob. 15DQCh. 14 - Prob. 16DQCh. 14 - Prob. 17DQCh. 14 - Prob. 18DQCh. 14 - Prob. 19DQCh. 14 - Bond financing Identify the following as either an...Ch. 14 - Prob. 2QSCh. 14 - Prob. 3QSCh. 14 - Prob. 4QSCh. 14 - Prob. 5QSCh. 14 - Prob. 6QSCh. 14 - Prob. 7QSCh. 14 - Prob. 8QSCh. 14 - Prob. 9QSCh. 14 - Prob. 10QSCh. 14 - Prob. 11QSCh. 14 - Prob. 12QSCh. 14 - Bond features and terminology Enter the letter of...Ch. 14 - Prob. 14QSCh. 14 - Prob. 15QSCh. 14 - Prob. 16QSCh. 14 - Prob. 17QSCh. 14 - Prob. 18QSCh. 14 - Prob. 19QSCh. 14 - Prob. 20QSCh. 14 - Prob. 1ECh. 14 - Prob. 2ECh. 14 - Prob. 3ECh. 14 - Prob. 4ECh. 14 - Prob. 5ECh. 14 - Prob. 6ECh. 14 - Duval Co. issues four-year bonds with a 100,000...Ch. 14 - Prob. 8ECh. 14 - Prob. 9ECh. 14 - Prob. 10ECh. 14 - Prob. 11ECh. 14 - Prob. 12ECh. 14 - Prob. 13ECh. 14 - Prob. 14ECh. 14 - Prob. 15ECh. 14 - Prob. 16ECh. 14 - Prob. 17ECh. 14 - Prob. 18ECh. 14 - Prob. 19ECh. 14 - In each of the following separate cases, indicate...Ch. 14 - Prob. 21ECh. 14 - Prob. 22ECh. 14 - Prob. 1APCh. 14 - Prob. 2APCh. 14 - Prob. 3APCh. 14 - Prob. 4APCh. 14 - Prob. 5APCh. 14 - Prob. 6APCh. 14 - Prob. 7APCh. 14 - Prob. 8APCh. 14 - Prob. 9APCh. 14 - Prob. 10APCh. 14 - Prob. 11APCh. 14 - Refer to the lease details in Problem 14-11A....Ch. 14 - Prob. 1BPCh. 14 - Prob. 2BPCh. 14 - Prob. 3BPCh. 14 - Prob. 4BPCh. 14 - Prob. 5BPCh. 14 - Prob. 6BPCh. 14 - Prob. 7BPCh. 14 - Prob. 8BPCh. 14 - Prob. 9BPCh. 14 - Prob. 10BPCh. 14 - Prob. 11BPCh. 14 - Prob. 12BPCh. 14 - Prob. 14SPCh. 14 - Prob. 1AACh. 14 - Prob. 2AACh. 14 - Prob. 3AACh. 14 - Prob. 1BTNCh. 14 - Prob. 2BTNCh. 14 - Prob. 3BTNCh. 14 - Prob. 5BTN
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