Question

The Harris Company is the lessee on a four-year lease with the following payments at the end of each year:

Year 1: $ 20,000

Year 2: $ 25,000

Year 3: $ 30,000

Year 4: $ 35,000

An appropriate discount rate is 7 percentage, yielding a present value of $91,718.

a-1. If the lease is an operating lease, what will be the initial value of the right-of-use asset?

a-2. If the lease is an operating lease, what will be the initial value of the lease liability?

a-3. If the lease is an operating lease, what will be the lease expense shown on the income statement at the end of year 1?

a-4. If the lease is an operating lease, what will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

a-5. If the lease is an operating lease, what will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

Answer 1

a-1. Since lease is a operating lease, NO ENTRY is required @ inception of the lease. Hence, no right of use asset is recognized.

a-2. Since lease is a operating lease, NO ENTRY is required @ inception of the lease. Hence, no Lease liability is recognized.

a-3. Lease Rental $ 20000 will be shown as expense.

Year 1	Lease Rental a/c Dr	20000
	To Cash a/c		20000

a-4. Since there is no liability recognized, no interests will generate. Hence NO ENTRY is required.

a-5. Since no right of use asset is recognized, no amortization to be made. Hence NO ENTRY is required.