Question

Ely Roofing Contractors enters into a lease for the use of new equipment. The term of the lease is three years. The annual lease amount is $6,000. The present value of the lease payments is $50,000. Ely Roofing estimates the economic life of the equipment to be five years. The lease is considered a finance lease. The journal entry to record the initial transaction will include a

Answer 1

The journal entry to record the initial transaction (Right of Use Asset and Lease Liability of $50,000) for Ely Roofing Contractors, who enters into a lease for the use of new equipment for 3 years at an annual lease payment of $6,000 is as follows:

Journal Entry:

Debit Right of Use Asset $50,000

Credit Lease Liability $50,000

• To record the initial transaction of the Lease Liability and the Right of Use Asset.

How to record the initial lease transactions?

The present value of annual lease payments is first computed.  

With this figure, the recording of the asset and liability is completed by debiting the Right of Use Asset and crediting the Lease Liability account.

Data and Calculations:

Annual lease payment = $6,000

Present value of lease payments = $50,000

Economic life of the equipment = 5 years

Lease term = 3 years

Nature of lease = finance lease

Initial Transaction Analysis:

Right of Use Asset $50,000 Lease Liability $50,000

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