Question

LeBron James (LBJ) Corporation agrees on January 1, 2020, to lease equipment from Cavaliers, Inc. for 3 years. The lease calls for annual lease payments of $23,000 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, 2020 (commencement of the operating lease), and on December 31, 2020. Assume the implicit rate used by the lessor is unknown, and LBJ's incremental borrowing rate is 6%.

Answer 1

Step-by-step explanation:

Lease Liability on January 1, 2020 = Present Value of Annual lease payments discounted at 6%

Annual Interest 6%

Number of Lease payments in 3 years 3

Annual payment $23,000

Lease Liability on January 1 $65,168

*(using PV function Rate=0.04. Nper=3, Pmt=-23,000,Type=1(Payment at beginning of period)

Journal entry

Date Account Titles and Explanations Debit Credit

01-01-2020 Right of use of assets $65,168

To, Lease Payable $65,168

( To record the lease liability)

01-01-2020 Lease Payable $23,000

To, Cash $23,000

(To record the payment of lease rental)

12/31/20 Lease Expense 23,000

Lease Liability 2,530

[(65,168 - 23,000) x 6%]

Right-of-use Asset 20,470

( To record the lnterest expenses)