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 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	$5,000	25,000	26000	27,000	28,000	29,000
Income statement:
Periodic lease expense (straight-line)
Prepaid (accrued) rent for period		29,000
Balance sheet at end of year:
Lease liability		25,000
ROU asset:
Lease liability
Adjust: Accrued rent (cumulative)
Unamortized direct initial costs
ROU asset

Subject Financial Accounting