Question

All the information you need are provided below (use the PV table of Annuity to solve)- mainly need help with part b:

Big Bucks leased equipment to Shannon Company on July 1, 2021. The lease payments were calculated to provide the lessor an 8% return. Nine annual lease payments of $35,000 are due each July 1, beginning July 1, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
a. Prepare the journal entries to record the lease by Shannon on July 1, 2021, and on December 31, 2021, the end of the reporting period. Consider this to be a finance lease. (below are my answers for part a)

1	July 01, 2021	Right-of-Use Assets	236,132
	(6.74664 * 35,000)	Lease Payable		236,132
2	July 01, 2021	Lease payable	35,000
		Cash		35,000
3	December 31, 2021	Interest expense	8,045
	(8%*1/2)*(236132-35000)	Interest payable		8,045
4	December 31, 2021	Amortization expense	11,807
	(236132.4/10)*1/2	Right-of-use asset		11,807

b. Prepare the journal entries to record the lease by Shannon on July 1, 2021, and on December 31, 2021, the end of the reporting period. Consider this to be an operating lease. (4 journal Entries Required)

1- July.1.2021 (Record the lease)

2- July.1.2021 (Record cash payments)

3- Dec.31.2021 (Record interest expense)

4- Dec.31.2021 (Record Amortization expense)

Answer 1

In case of operating lease , lease rent is recorded as an operating expense and the lessee can not claim any depreciation over the same in operating lease.

Entry for payment of lease rental

July.1.2021 Lease Rental Dr. 35,000

To Cash 35,000

Transfer of lease rent paid to Profit and Loss Account

Dec.31.2021 Profit and Loss Account Dr. 35,000

To Lease Rental 35,000

No interest expense to be recorded in case of operating lease. It is just like rent agreement.