Final answer:
On January 1, Tucker Company should recognize the first lease payment of $100,000 to Franz Inc. by debiting Lease Expense and crediting Cash/Bank. The present value of the lease payments should also be recorded as a lease liability and an asset on the balance sheet in accordance with lease accounting standards.
Step-by-step explanation:
The question pertains to how Tucker Company should recognize the first lease payment to Franz Inc. on January 1, Year 1, for equipment leased. When a company leases an asset, it must account for the lease payment in its financial records, this includes recognizing the expense associated with the use of the leased asset over time and recording a liability for the obligation to make future lease payments.
On January 1, Year 1, Tucker should record the lease payment as follows: debit Lease Expense and credit Cash/Bank for the amount of the payment (in this case, $100,000, since the first payment is due immediately). If lease payments were not required to be made at the start of the lease, Tucker would recognize a liability for the lease obligation and an asset for the right to use the leased equipment, then amortize the liability and the asset over the lease term.
However, it should be noted that the present value of the lease payments ($357,710) would be recorded as a lease liability and a right-of-use asset on the lessee's balance sheet at the lease commencement date, according to the new lease accounting standards under ASC 842 or IFRS 16, depending on the reporting framework followed by Tucker Company. Yet, the specific recognition of the initial cash outflow will be the same.