Question

On December 31, Year One, the Abertion Company decides to lease a piece of equipment rather than buy it. The lease is for ten years. Payments are $22,000 each December 31 beginning on December 31, Year One. The implicit rate is 9 percent and is known by Abertion. The present value of an annuity due of $1 at 9 percent for ten periods is 6.99525. Assume this lease is an operating lease. What journal entries are made in Year One?

a. Lease liability 22,000
Cash 22,000
Lease liability 22,000, Cash 22,000,

b. Right-of-Use Asset 153,896
Lease liability 22,000
Lease liability 153,896
Cash 22,000
Right-of-Use Asset 153,896, Lease liability 22,000, Lease liability 153,896, Cash 22,000,

c. Right-of-Use Asset 153,896
Lease liability 153,896
Right-of-Use Asset 153,896, Lease liability 153,896,

d. Lease Expense 153,896
Lease Payable 153,896

Answer 1

For an operating lease, Abertion Company would record a lease expense and a cash payment of $22,000 in Year One. No right-of-use asset or lease liability would be recognized on the balance sheet for this type of lease.

Step-by-step explanation:

Since the lease mentioned is an operating lease, there is no initial recognition of a right-of-use asset and a lease liability. In an operating lease, lease payments are typically expensed on a straight-line basis over the term of the lease. However, due to the information provided mentioning present value calculations and implicit rates, it appears that the lease could be accounted for as a finance lease. If it were a finance lease, the company would record a right-of-use asset and a lease liability at the commencement date by multiplying the lease payments by the present value factor supplied. But as specified, assuming this is an operating lease, the correct journal entry for Year One would involve simply recognizing the lease expense and the payment made.

The journal entry for Year One would be:

• Lease Expense 22,000
• Cash 22,000