Accounting for Leases

On January 3, 2020, Hanna Corporation signed a lease on a machine for its manufacturing operation and the lease commences on the same date. The lease requires Hanna to make six annual lease payments of $12,000 with the first payment due December 31,2020. Hanna could have financed the machine by borrowing the purchase price at an interest rate of 7%.

a. Prepare the journal entries that Hanna Corporation would make on January 3 and December 31, 2020, to record this lease assuming. i. the lease is reported as an operating lease. ii. the lease is reported as a finance lease. b. Post the journal entries of part a to the appropriate T-accounts. c. Show how the entries posted in part b would affect the financial statements using the financial statement effects template.

Note: Round answers to the nearest dollar. Use rounded answers for subsequent computations.

Journal Entries

i. The lease is reported as an operating lease.

Date	Description	Debit	Credit
1/3/19	ADD DESCRIPTION
12/31/19
12/31/19
	Operating lease liability

ii. The lease is reported as a finance lease.

ii. The lease is reported as a finance lease.

Date	Description	Debit	Credit
1/3/19
12/31/19
12/31/19	Interest expense

T accounts

Cash
	Answer	Answer

Operating Lease Liability
	Answer	Answer
	Answer	Answer

Right-of-use Asset-Operating Lease
	Answer	Answer

Lease Expense
	Answer	Answer

ii. the lease is reported as a finance lease.

Cash
	Answer	Answer

Finance Lease Liability
	Answer	Answer

Accumulated Amortization
	Answer	Answer

Right-of-use Asset-Finance Lease
	Answer	Answer

Interest Expense
	Answer	Answer

Financial statement effects template

i. the lease is reported as an operating lease.

		Balance Sheet					Income Statement
Transactions	Cash Asset	Noncash Assets	Contra Assets	Liabilities	Contributed Capital	Earned Capital	Revenues	Expenses	Net Income
Operating leasecommences.
Lease payment.
Record leaseexpense andchanges to assetand liability.

ii. the lease is reported as a finance lease.

		Balance Sheet					Income Statement
Transactions	Cash Asset	Noncash Assets	Contra Assets	Liabilities	Contributed Capital	Earned Capital	Revenues	Expenses	Net Income
Finance leasecommences.
Amortization ofleased asset.
Made annualpayment.