Question

On January 1, Harbor (lessee) signs a five-year lease for equipment that is accounted for as a finance lease. The lease requires five $28,000 lease payments (the first at the beginning of the lease and the remaining four at December 31 of years 1, 2, 3, and 4), and the present value of the five annual lease payments is $125,023, based on a 6% interest rate.

1. Prepare the January 1 journal entry Harbor records at inception of the lease for any asset or liability.
2. Prepare the January 1 entry Harbor records for the first $28,000 cash lease payment.
3. If the leased asset has a five-year useful life with no salvage value, prepare the December 31 journal entry Harbor records each year for amortization of the leased asset.

Answer 1

Sr no.	Date	Account title	Debit $	Credit $
1	Jan-01	Right of use asset	$      125,023
		Lease liability		$       125,023
2	Jan-01	Lease liability	$         28,000
		Cash		$         28,000
3	Dec 31 Yr 1	Amortization of ROU asset	$         25,005
		Right of use asset		$         25,005
	Dec 31 Yr 2	Amortization of ROU asset	$         25,005
		Right of use asset		$         25,005
	Dec 31 Yr 3	Amortization of ROU asset	$         25,005
		Right of use asset		$         25,005
	Dec 31 Yr 4	Amortization of ROU asset	$         25,005
		Right of use asset		$         25,005
	Dec 31 Yr 5	Amortization of ROU asset	$         25,005
		Right of use asset		$         25,005

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