Question

On January 1, 2015, Jennifer Corporation leased equipment from Duplex Company for five years and an annual payment of $35,000 at the beginning of each year. The equipment has a useful life of six years. The first payment was made on January 1, 2015. Jennifer's incremental borrowing rate is 6 percent per year. The entry made to record the initial lease liability will include a:

Group of answer choices

A.)debit to Leased Equipment and credit to Lease Liability for $175,000.

B.)debit to Rent Expense and credit to Rent Payable for $35,000.

C.)debit to Leased Equipment and credit to Lease Liability for $156,279.

D.)debit to Lease Liability and credit to Cash for $175,000.

E.)debit to Prepaid Rent and credit to Lease Liability for $35,000.

Answer 1

Correct answer---------C.)debit to Leased Equipment and credit to Lease Liability for $156,279.

.

Working

The life of the asset is 6 years and lease is for 5 years so it means the lease is a finance lease.

The present value of lease payment will be recorded as the lease liability for finance lease purpose.

Working for present value are given below

	Lease payment per year	PVAF	Present value
Beginning of year 1	$        35,000.00	1	$         35,000
From beginning of year 2 to year 6 beginning	$        35,000.00	3.46511	$       121,279
	Total Present value of lease payments		$       156,279

We don't discount first $35000 because it is paid in beginning.