Question

Chance Enterprises leased equipment from Third Bank Leasing on January 1, 2018. Third Bank purchased the equipment at a cost of $1,000,000. Chance elected the short-term lease option. Appropriate adjusting entries are made annually.

Related Information:

Lease term 1 year (4 quarterly periods)
Quarterly lease payments $40,000 at Jan. 1, 2018, and at Mar. 31, June 30, and Sept. 30.
Economic life of asset 5 years
Interest rate charged by the lessor 8%

Required:
Prepare appropriate entries for Chance from the beginning of the lease through December 31, 2018.

Answer 1

Since this is a short lease, you do not need to make any journal entries regarding right of use asset or lease liabilities. You only record the total lease payment as an expense in your income statement (similar to renting an office).

January 1, 2018, first lease payment to Third Bank Leasing

Dr Lease expense 40,000

Cr Cash 40,000

March 31, 2018, second lease payment to Third Bank Leasing

Dr Lease expense 40,000

Cr Cash 40,000

June 30, 2018, third lease payment to Third Bank Leasing

Dr Lease expense 40,000

Cr Cash 40,000

September 30, 2018, fourth lease payment to Third Bank Leasing

Dr Lease expense 40,000

Cr Cash 40,000