Question

Bulls, Inc. leases a piece of equipment to Bucks Company on January 1, 2025. The contract stipulates a lease term of 5 years, with equal annual rental payments of $4,523 at the end of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $30,000, a book value of $27,000, and a useful life of 8 years. At the end of the lease term, Bulls expects the residual value of the asset to be $12,000, and this amount is guaranteed by a third party. Assuming Bulls wants to earn a 4% return on the lease and collectibility of the lease payments is probable, record its journal entry at the commencement of the lease on January 1, 2025.

Answer 1

Journal Entry will be

Debit Lease receivable$30,000

Credit Assets $27,000

Credit Unearned lease finance income $3,000

(To record lease at the commencement of lease)

Right-of-Use Asset: This account represents the asset Bulls, Inc. acquires the right to use through the lease agreement. The amount is calculated as the present value of the lease payments minus the difference between the asset's book value and expected residual value.

Lease Liability: This account represents Bulls, Inc.'s obligation to fulfill the lease agreement and pay the lease payments.

Unearned Lease Revenue: This account represents the income Bulls, Inc. has not yet earned because the lease payments are received at the end of each year. The amount is equal to the present value of the lease payments.