Question

On January 1, Rogers (lessee) signs a three-year lease for machinery that is accounted for as a operating lease. The lease requires three $19,221 lease payments (the first at the beginning of the lease and the rest at December 31 of Year 1 and Year 2). The present value of the three annual lease payments is $54,900, using a 5.120% interest rate. The lease payment schedule follows.

Date	(A) Beginning Balance of Lease Liability				(B) Debit Interest on Lease Liability 6.003% × (A)			+	(C) Debit Lease Liability (D) − (B)			=	(D) Credit Cash Lease Payment			(E) Ending Balance of Lease Liability (A) − (C)
Jan. 1, Year 1	$	54,900			$	0			$	19,221			$	19,221		$	35,679
Dec. 31, Year 1		35,679				1,827				17,394				19,221			18,285
Dec. 31, Year 2		18,285				936				18,285				19,221			0
					$	2,763			$	54,900			$	57,663

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 $19,221 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 $19,221 cash lease payment at the end of (a) Year 1 and (b) Year 2.

Answer 1