Question
On January 1, 2021, Jimmy Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Jimmy to make annual
On January 1, 2021, Jimmy Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Jimmy to make annual payments of $20,000 at the beginning of each year for five years with title to pass to Jimmy at the end of this period. The machinery has an estimated useful life of 7 years and no guaranteed residual value. Jimmy uses the straight-line method of depreciation for all of its fixed assets. Jimmy accordingly accounts for this lease transaction as a finance lease. The present value of the lease payments were determined to have a present value of $90,919 at an implicit interest rate of 5%. Jimmy includes the following entry to record the lease on its books:
a. a debit to Lease Liability of $90,919
b. a credit to Lease Liability of $90,919
c. a debit to Right-of-Use Asset of $100,000
d. a debit to Deferred Lease Expense of $9,081
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