On January 1, Rogers (lessee) signs a three-year lease for machinery that is accounted for as a operating lease. The lease requires three $14,875 lease payments (the first at the beginning of the lease and the remaining two at December 31 of Year 1 and Year 2). The present value of the three annual lease payments is $42,200, using a 5.860% interest rate. The lease payment schedule follows.
Date (A) Beginning Balance of Lease Liability (B) Debit Interest on Lease Liability 5.860% × (A) + (C) Debit Lease Liability (D) − (B) = (D) Credit Cash Lease Payment (E) Ending Balance of Lease Liability (A) − (C)
January 1, Year 1 $ 42,200 $ 0 $ 14,875 $ 14,875 $ 27,325
December 31, Year 1 27,325 1,601 13,274 14,875 14,051
December 31, Year 2 14,051 823 14,051 14,875 0
$ 2,425 $ 42,200 $ 44,625
Required:
Prepare the January 1 journal entry at the start of the lease to record any asset or liability.
Prepare the January 1 journal entry to record the first $14,875 cash lease payment.
Prepare the December 31 journal entry to record amortization at the end of (a) Year 1, (b) Year 2, and (c) Year 3.
Prepare the December 31 journal entry to record the $14,875 cash lease payment at the end of (a) Year 1 and (b) Year 2.
Prepare the December 31 journal entry to record amortization at the end of (a) year 1, (b) year 2, and (c) year 3.
