Question

Recording Finance Lease Journal Entries— Purchase Option

Lessee Company enters into a 6-year finance lease of non-specialized equipment with Lessor Company on January 1, 2020. Lessee has agreed to pay $28,000 annually beginning immediately on January 1, 2020. The lease includes an option for the lessee to purchase the equipment at $3,000, which is $2,000 below the estimated fair value at lease end. Lessee Company is reasonably certain that it will exercise the purchase option. The economic life of the asset is 7 years. The lessee’s incremental borrowing rate is 7% and the lessor’s implicit rate is not readily determinable by the lessee. Record Lessee Company’s journal entries on (a) January 1, 2020, and (b) December 31, 2020, assuming that the lease is properly classified as a finance lease.

Note: Round your final answers to the nearest whole dollar.

	Date	Account Name	Dr.	Cr.
a.	Jan. 1, 2020		Answer	Answer
			Answer	Answer
		To record asset and liability
	Jan. 1, 2020		Answer	Answer
			Answer	Answer
		To record cash lease payment
b.	Dec. 31, 2020		Answer	Answer
			Answer	Answer
		To record interest
	Dec. 31, 2020		Answer	Answer
			Answer	Answer
		To record amortization

Answer 1