Question

LeBron James (LBJ) Corporation agrees on January 1, 2017, to lease equipment from Cavaliers, Inc. for 3 years. The lease calls for annual lease payments of $17,000 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, 2017 (commencement of the operating lease), and on December 31, 2017. 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.) Click here to view the factor table. Date Account Titles and Explanation Debit Credit 1/1/17 Right-of-Use Asset Lease Liability (To record lease liability) 1/1/17 Lease Liability TCash (To record lease payment) 12/31/17 Lease Expense xa Right-of-Use Asset Lease Liability

Answer 1

Journal Entries:

Date	Account title and Explanation	Debit	Credit
1/1/17	Right-of-Use Asset*	$48,168
	Lease Liability		$48,168
	[To record lease liability]
1/1/17	Lease Liability	$17,000
	Cash		$17,000
	[To record lease payment]
12/31/17	Lease Expense	$17,926
	Right-of-Use Asset**		$16,056
	Lease Liability***		$1,870
	[To record lease expense]

Calculations:

*

First lease payment	$17,000
Present value of the remaining lease payments	$31,168
[$17,000 x 1.83339 present value annuity factor (6%, 2 years)]
Right of use/ Lease liability	$48,168

**Right-of-use Amortize every year = Total right-of-use ÷ Number of lease periods

= $48,168 ÷ 3 Years

=$16,056

*** Lease expense = Carrying amount x Implicit rate

= $31,168 x 6%

=$1,870