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:

Answer 1

1. Dr Equipment $ 905,861.00

Credit Lease Payable $ 905,861.00

2. Dr Lease Payable $ 125,000.00

Cr Cash $ 125,000.00

3. Dr Lease payable $ 115,000.00

Dr Interest Expense $ 10,000.00

Cr Cash $ 125,000.00

Step-by-step explanation:

Preparation of Journal entries

1. Preparation of the journal entry to record the long term lease in the General Fund

Dr Equipment $ 905,861.00

Credit Lease Payable $ 905,861.00

2. Preparation of the journal entry to record the first lease payment on January 10, 2017

Dr Lease Payable $ 125,000.00

Cr Cash $ 125,000.00

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

Dr Lease payable $ 115,000.00

(125,000×92%)

Dr Interest Expense $ 10,000.00

(125,000 × 8%)

Cr Cash $ 125,000.00