On January 3, 2017, Hanna Corporation signed a lease on a machine for its manufacturing operation. The lease requires Hanna to make six annual lease payments of $12,000 with the first payment due December 31, 2017. 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, 2017, to record this lease assuming its i. an operating lease and ii. a capital lease.

Round answers to the nearest whole number. If no entry is required, select "No entry" from the drop-down answer options for the debit and credit entries.

i. the lease is reported as an operating lease.

General Journal
Date	Description	Debit	Credit
Jan. 3	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record inception of lease
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record depreciation expense.
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record payment on lease.

ii. the lease is reported as a capital lease.

General Journal
Date	Description	Debit	Credit
Jan. 3	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record inception of lease
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record depreciation expense.
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetPrepaid rentDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	Cash	Answer	Answer
	To record payment on lease.

b. Assuming that the lease is treated as a capital lease, post the journal entries of part a to the appropriate T-accounts.

Cash
	Answer	Answer

Lease Liability
	Answer	Answer

Leased Asset
	Answer	Answer

Accumulated Depreciation
	Answer	Answer

Interest Expense
	Answer	Answer

Depreciation Expense
	Answer	Answer

c. Show how the entries posted in part b would affect the financial statements using the financial statement effects template.

Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	-	Contra Asset	=	Liabilities	+	Contrib. Capital	+	Earned Capital
1. Signed a capital lease.	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer
2. Depreciation on leased asset.	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer
3. Made annual lease payment	Answer	+	Answer	-	Answer	=	Answer	+	Answer	+	Answer

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