On January 1, Kwak (lessee) signs a three-year lease for equipment that is accounted for as a finance lease. The lease requires three $14,000 lease payments (the first at the beginning of the lease and the remaining two at December 31 of Year 1 and Year 2). The present value of the three annual lease payments is $39,000, using a 7.9% interest rate. The lease payment schedule follows.

Required

1. Prepare the January 1 journal entry at the start of the lease to record any asset or liability.

2. Prepare the January 1 journal entry to record the first $14,000 cash lease payment.

3. Prepare the December 31 journal entry to record straight-line amortization with zero salvage value at the end of (a) Year 1, (b)Year 2, and (c) Year 3.

4. Prepare the December 31 journal entry to record the $14,000 cash lease payment at the end of (a) Year 1 and (b) Year 2.

Transcribed Image Text:

Payments (C) (E) (A) (B) (D) Debit Interest on Credit Debit Ending Balance Beginning Balance Lease Liability + Lease Liability (D) – (B) = Cash Lease of Lease Liability |(A) – (C) of Lease Liability 7.9% x (A) Date Jan. 1, Year 1 Dec. 31, Year 1 Dec. 31, Year 2 Payment $39,000 25,000 $14,000 $14,000 14,000 S25,000 12,975 $1,975 1,025 12,025 12,975 12,975 14,000 $3,000 $39,000 $42,000