Accounting for Leases

On July 1, 2017, Shroff Company leased a warehouse building under a 10-year lease agreement. The lease requires quarterly lease payments of $4,500. The first lease payment is due on September 30, 2017. The lease was reported as a capital lease using an 8% annual interest rate.

Required a. Prepare the journal entry to record the initial signing of the lease on July 1, 2017. (Use a financial calculator or Excel to compute. Round answer to the nearest whole number.)

Date	Description	Debit	Credit
07/01/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer

b. Prepare the journal entries that would be necessary on September 30 and December 31, 2017. (Use rounded answer from above for subsequent calculations. Round your answers to the nearest dollar.)

Date	Description	Debit	Credit
09/30/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	To record depreciation expense.
09/30/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	Interest expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	To record lease payment.
12/31/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	To record depreciation expense.
12/31/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	Interest expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	To record lease payment.

c. Post the entries from parts a and b in their appropriate T-accounts.

Cash (A)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Leased Asset (A)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Accumulated Depreciation (XA)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Lease Liability (L)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Interest Expense (E)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

Depreciation Expense (E)
07/01/17	Answer	Answer
09/30/17	Answer	Answer
12/31/17	Answer	Answer

d. Prepare a financial statement effects template to show the effects of the entries from parts a and b on the balance sheet and income statement.

Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	-	Contra-Assets	=	Liabilities	+	Contrib. Capital	+	Earned Capital
7/1/17 Signed a capital lease	$Answer	+	$Answer	-	$Answer	=	$Answer	+	$Answer	+	$Answer
9/30/17 Depreciation on leased asset	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer
9/30/17 Made quarterly lease payment	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer
12/31/17 Depreciation on leased asset	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer
12/31/17 Made quarterly lease payment	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer

Income Statement
	Revenue	-	Expenses	=	Net Income
	$Answer	-	$Answer	=	$Answer
	Answer	-	Answer	=	Answer
	Answer	-	Answer	=	Answer
	Answer	-	Answer	=	Answer
	Answer	-	Answer	=	Answer

e. Redo parts a and b assuming that the lease is reported as an operating lease. (If no entry is required, enter "No entry" for the debit and credit account name.)

Date	Description	Debit	Credit
7/1/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
9/30/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
12/31/2017	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer
	AnswerNo entryCashLeased assetAccumulated depreciationLease liabilityDepreciation expenseInterest expenseRent expense	Answer	Answer