Question

Candy Salons Leasing leased electronic equipment to Georgia-Atlantic on January 1, 2021. Candy Salons Leasing purchased the equipment from International Machines at a cost of $153,255. Here is the related information:

Lease term                   2 years (8 quarters)

Quarterly payments     $20,000 at the beginning of each period

Economic life              2 years

Fair value of asset       $153,255

Annual implicit rate    5%

What do the lessee’s entries include on April 1, 2021?

	a.	Debit Lease Payable by $20,000
	b.	Debit Lease Payable by $18,334 and Interest Expense by $1,666
	c.	Credit Lease Payable by $18,334 and Interest Expense by $1,666
	d.	Credit Lease Payable by $20,000
	e.	None of the answers are correct

Answer 1

Answer:

b. Debit Lease Payable by $18,334 and Interest Expense by $1,666

Explanation:

Fair value of the asset	$153,255
(Less): First lease payment	($20,000)
Lease payables at Jan 1,2021	$133,255

.

Entry on 4/1/2021:

Date	Account title and explanation	Debit	Credit
4/1/2021	Interest expense [$133,255 x 5% x 3/12]	$1,666
	Lease payable	$18,334
	Cash		$20,000
	[To record lease payment]

Therefore, Debit Lease Payable by $18,334 and Interest Expense by $1,666

Thus, Option b is correct and remaining options are incorrect.