Brief Exercise 21A-15 LeBron James (LBJ) Corporation agrees on January 1, 2017,

Question

Brief Exercise 21A-15

LeBron James (LBJ) Corporation agrees on January 1, 2017, to lease equipment from Cavaliers, Inc. for 3 years. The lease calls for annual lease payments of $22,000 at the beginning of each year. The lease does not transfer ownership, nor does it contain a bargain purchase option, and is not a specialized asset. In addition, the useful life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment.

Prepare LBJ’s journal entries on January 1, 2017 (commencement of the operating lease), and on December 31, 2017. Assume the implicit rate used by the lessor is unknown, and LBJ’s incremental borrowing rate is 6%. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

1/1/17

1/1/17

12/31/17

Date

Account Titles and Explanation

Debit

Credit

1/1/17

(To record lease liability)

1/1/17

(To record lease payment)

12/31/17

Explanation / Answer

based on the above conditions of agreement between both its an operating lease.

hence the lease paymenyt made is treated as an expense.

1/1/17

1. Cavalier a/c (lessor) $22000

to bank a/c $22000

(being lease payment through bank made at beginning of the year )

31/12/17

profit and loss a/c Dr $22000

to annual lease payment a/c $22000

(being expense made to be recorded at year end)

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