Question
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
- 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 Lessees 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 |
|
|
|
|
|
|
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started