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Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance...

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Accounting

  1. Lessee enters into a four-year lease of equipment and concludesthat the agreement is a finance lease because the lease contains anoption for Lessee to purchase the equipment at the end of the leaseand the Lessee is reasonably certain to exercise that option. Thearrangement provides the following:

Lease term

Four years, with the first payment dueat lease commencement and the remainder annually at the leaseanniversary date thereafter

Annual payments, beginning at leasecommencement and annually thereafter

Commencement – $50,000

Year 2 – $53,000

Year 3 – $55,000

Year 4 -- $60,000

Discount rate

4.5%

PV of lease payments

$204,577

Complete the following schedule toshow the impact on the income statement and balance sheet.

Initial

Year 1

Year 2

Year 3

Year 4

Cash lease payments

Income statement:

Lease expense recognized:

Interest expense

Amortization expense

Total periodic expense

Balance sheet:

ROU asset

Lease liability

  • Prepare the journal entries at the time of the leasecommencement and for Year 1 of the lease term.

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