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 $21,000 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 4%. (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 o decimal places, e.g 5,275.) Click here to view the factor table. Date Account Titles and Explanation Debit Credit (To record lease liability) (To record lease payment) 12/31/17

Explanation / Answer

It's is the case of operating lease as significant risk and rewards has not been transferred .and the conditions to classify as finance lease is not fulfilled . Hence treated as operating lease.

01/01/2017

Lease rental account DR,. 21000

To lesser (cavalier) 21000

(Being liability recorded.)

01/01/2017

Lesser(cavalier ) Dr. 21000

To bank 21000

(Being payment made)

31/12/2017

Profit and loss accounts Dr 21000

To lease rental account 21000

(being lease rental transfer to p&l account)

Payment made under operating lease is recorded as per SLM. But in the given question 21000 is equivalent amount already.

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