Question

Algoma, Inc., signs a five-year lease for office equipment with Office Solutions. The present value of the lease payments is $15,499. Prepare the journal entry that Algoma records at the inception of this finance lease.

Answer 1

Dr. Lease asset office equipment $15,499

Cr. Lease Liability $15,499

Step-by-step explanation:

A capital lease is a lease between two parties in which a party transfer leases asset to in exchange of lease payments.

To make a lease finance lease following criteria must be fulfilled.

• The asset will be transferred to lessee at the end of lease period
• Agreement must contain bargain purchase option
• Lease period must be 75% or more of useful life of asset
• Value of lease must be equal or more than the market value of asset