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Concept explainers
(1)
Operating lease
This type of lease refers to the lease where the lessor permits the lessee to make use of the asset for a specified time period by charging rent without actual transfer of ownership of the asset which is leased. This type of lease cancellable and is of short term.
To Prepare: appropriate entries for H Consulting (Lessee) to record the right-of-use asset and lease liability at January 1, 2018.
(1)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Transaction on January 01, 2018: Record the lease payable.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Right-of-use asset (1) | 16,428 | ||||
Lease Payable | 16,428 | ||||
(To record the lease payable) |
Table (1)
Working note:
Explanation:
- Right-of-use asset is an asset. There is an increase in asset. Therefore, debit right-of-use asset account by $16,428.
- Lease payable is a liability. There is an increase in liability. Therefore, credit lease liability by $16,428.
(2)
To Prepare: appropriate entries for H Consulting (Lessee) to record the right-of-use asset and lease liability at December 31, 2018.
(2)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Transaction on December 31, 2018:
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (2) | 821 | |||
Lease payable (Difference) | 6,179 | |||
Cash | 7,000 | |||
(To record annual lease payment and interest expenses.) | ||||
Amortization expense (3) | 5,179 | |||
Right-of-use asset | 5,179 | |||
(To record amortization expense.) |
Table (2)
Working note:
Calculate the amount of interest expense for December 31, 2018 as follows:
Calculate the amortization expense for December 31, 2018 as follows:
Transaction on December 31, 2018: Record lease payments and interest expense
- Interest expense decreases
stockholders’ equity. Therefore, debit interest expense by $821. - Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $6,179.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $7,000.
Transaction on December 31, 2018: Record amortization expense
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $5,179.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $5,179.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
(3)
To Prepare: appropriate entries for H Consulting (Lessee) to record the right-of-use asset and lease liability at December 31, 2019.
(3)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Transaction on December 31, 2019:
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (4) | 512 | |||
Lease payable (Difference) | 5,488 | |||
Cash | 6,000 | |||
(To record annual lease payment and interest expenses.) | ||||
Amortization expense (5) | 5,488 | |||
Right-of-use asset | 5,488 | |||
(To record amortization expense.) |
Table (3)
Working note:
Calculate the amount of interest expense for December 31, 2019 as follows:
Calculate the amortization expense for December 31, 2019 as follows:
Transaction on December 31, 2019: Record lease payments and interest expense
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $512.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $5,488.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $6,000.
Transaction on December 31, 2019: Record amortization expense
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $5,488.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $5,488.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
(4)
To Prepare: appropriate entries for H Consulting (Lessee) to record the right-of-use asset and lease liability at December 31, 2020.
(4)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Transaction on December 31, 2020:
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (6) | 238 | |||
Lease payable (Difference) | 4,762 | |||
Cash | 5,000 | |||
(To record annual lease payment and interest expenses.) | ||||
Amortization expense (7) | 5,762 | |||
Right-of-use asset | 5,762 | |||
(To record amortization expense.) |
Table (4)
Working note:
Calculate the amount of interest expense for December 31, 2020 as follows:
Calculate the amortization expense for December 31, 2020 as follows:
Transaction on December 31, 2020: Record lease payments and interest expense
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $238.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $4,762.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $5,000.
Transaction on December 31, 2020: Record amortization expense
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $5,762.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $5,762.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
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