Question

LeBron James (LBJ) Corporation agrees on January 1, 2020, to lease equipment from Cavaliers, Inc. for 3 years. The lease calls for annual lease payments of $23,000 at the beginning of each year. The lease does not transfer ownership, nor does it contain a bargain purchase option, and is not a specialized asset. In addition, the useful life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment.

Prepare LBJ’s journal entries on January 1, 2020 (commencement of the operating lease), and on December 31, 2020. Assume the implicit rate used by the lessor is unknown, and LBJ’s incremental borrowing rate is 6%. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Date Account Titles and Explanation Debit Credit [1/1/20 Right-of-Use Asset 65168 Lease Liability 65168 (To record lease liability) 1/1/20 Lease Liability 23000 Cash 23000 (To record lease payment) ~ 12/31/20 Lease Expense 23000 Right-of-Use Asset 2530 77 Lease Liability 20470

Answer 1

Date	Account Titles and Explanation	Debit	Credit
12/31/20	Lease Expense	23,000
	Lease Liability		2,530	[(65,168 - 23,000) x 6%]
	Right-of-use Asset		20,470