Question

The city of Morehead leased equipment. The life of the noncancellable lease is 10 years. Using an 8 percent interest rate, the present value of the lease payments is $905,861. The first payment of $125,000 is due when the lease begins, January 10, 2017. An additional payment is due on January 10th for each of the next 9 years. Prepare journal entries to record: 1. The long-term lease in the General Fund. 2. The first lease payment on January 10, 2017. 3. The second lease payment on January 10, 2018. Round answers to the nearest whole number.

Answer 1

1. Dr Equipment $ 905,861

Cr Lease Payable $ 905,861

2). Dr Lease Payable $ 125,000

Cr Cash $ 125,000

3) Dr Lease payable $ 115,000

Dr Interest Expense $ 10,000

Cr Cash $ 125,000

Step-by-step explanation:

1. Preparation of the journal entry for the long-term lease in the General Fund..

Dr Equipment $ 905,861

Cr Lease Payable $ 905,861

2) Preparation of the first lease payment Journal entry on January 10,

Dr Lease Payable $ 125,000

Cr Cash $ 125,000

3) Preparation of the journal entry to second lease payment on January 10, 2018

Dr Lease payable $ 115,000

Dr Interest Expense (125000 x 8%) $ 10,000.00

Cr Cash $ 125,000