Final answer:
In year two, a journal entry for the $22,000 lease payment would be made, splitting it into interest and a reduction of the lease liability. Interest expense is calculated based on the implicit rate and the remaining lease liability after the first payment, using the 9% implicit rate.
Step-by-step explanation:
The journal entries for year two for the Abertion Company's finance lease would include recording the lease payment and separating it into an interest expense and a reduction of the lease liability. Since the first lease payment was made at the inception of the lease, the payment made in year two will actually be for the second year of the lease. Using the information that the implicit rate is 9% and the present value of an annuity due of $1 at 9% for ten periods is $6.99525, we calculate the following:
The first entry on December 31, year two would be to record the lease payment of $22,000 with a debit to the lease liability and a credit to cash. The second entry involves recording interest expense. The interest expense is calculated by multiplying the outstanding lease liability at the beginning of the year by the implicit interest rate of 9%. After the first payment, the lease liability is the present value of the remaining payments.
To calculate the present value of the remaining payments after the first payment, we cannot directly use the given present value factor since it includes the first payment. Instead, we must adjust the lease liability established at the inception of the lease by subtracting the principal portion of the first payment, then apply the 9% interest rate to the adjusted lease liability to find out the interest expense for year two.