Question

Exercise 21-22 a-b

Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2020. The lease agreement called for annual rental payments of $4,892 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000, and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Rauch set the lease payments with the intent of earning a 5% return, and Donahue is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

Prepare the entries for Rauch for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20
1/1/2012/31/20
	(To record the recognition of the revenue)
1/1/2012/31/20
	(To record depreciation expense on the leased equipment)

Answer 1

The Lease is an Operating lease and hence the journal entries is the books of Rach is as follows:-

	Particulars	Debit	Credit
January 1, 2020	Cash A/c Dr.	4,892
	To Unearned Lease Revenue a/c		4,892
	(To record the lease liability )
December 31, 2020	Unearned Lease Revenue A/c	4,892
	To Lease Revenue a/c		4,892
	(To record the recognition of revenue)
December 31, 2020	Depreciation Expense A/c	3,333
	To Accumulated Depreciation a/c - Operating lease		3,333
	(To record depreciation expense on operating lease)

Depreciation expense = Book value/Estimated useful life

=$20,000/6 years

=$3,333 per year.