Question

Keller Corporation (the lessee) entered into a general equipment lease with Dallo Company (the lessor) on January 1 of Year 1. The following information pertains to this lease agreement:

1.	The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option.
2.	The lease term is 8 years and requires annual payments of $10,000 at the beginning of each year.
3.	The fair value of the equipment at lease inception is $100,000. Assume that the present value of lease payments discounted at a 10% interest rate is $58,684.19.
4.	The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time.

Required:

Prepare the journal entry that Keller Corporation would make during the first year of the lease assuming that the lease is classified as an operating lease.

Answer 1

Date	Account title and explanation	Debit	Credit
Jan 1, Year 1	Right-of-Use Asset                  [PV of lease payments]	$58,684.19
	Lease Liability		$58,684.19
	[To record the operating lease]
Jan 1, Year 1	Lease liability	$10,000.00
	Cash		$10,000.00
	[To record the first payment]
Dec 31, Year 1	Lease Expense	$10,000.00
	Right-of-Use Asset		$5,131.58
	Lease Liability		$4,868.42
	[To record accrued lease expense]

Calculations:

Carrying value of ROU asset	$58,684.19
(-) First payment	($10,000)
Balance	$48,684.19
x Rate	10%
= Lease liability	$4,868.42
Annual lease payment	$10,000
(-) Lease liability	($4,868.42)
Amortization of ROU asset	$5,132

*ROU-Right-of-Use