1.Lessee enters into a five-year lease of office space on January 1, and concludes that the agreement is an operating lease. Lessee pays initial direct costs of $5,000.The agreement provides the following:

Lease term

Five years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter

Annual payments, beginning at lease commencement and annually thereafter

Commencement - $25,000

Year 2 - $26,000

Year 3 - $27,000

Year 4 -- $28,000

Year 5 -- $29,000

Discount rate

4.0%

Present value (PV) of lease payments

$124,645

Complete the following table to show the impact on each year of Lessee's income statement and balance sheet. Prepare the journal entries for the Lessee at the commencement of the lease and at the end of year 1.

Initial

Year 1

Year 2

Year 3

Year 4

Year 5

Cash lease payments

Income statement:

Periodic lease expense (straight-line)

Prepaid (accrued) rent for period

Balance sheet at end of year:

Lease liability

ROU asset:

Lease liability

Adjust: Accrued rent (cumulative)

Unamortized direct initial costs

ROU asset