Question

LeBron James (LBJ) Corporation agrees on January 1, 2020, to lease equipment from Blossom, Inc. for 3 years. The lease calls for annual lease payments of $15,000 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 4%. (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.)

Answer 1

Answer
Lease Liability on January 1, 2020 = Present Value of Annual lease payments discounted at 4%
	Annual Interest	4%
	Number of Lease payments in 3 years	3
	Annual payment	$        15,000
	Lease Liability on January 1	$        43,291
	*(using PV function Rate=0.04. Nper=3, Pmt=-15,000,Type=1(Payment at beginning of period)
Journal entry
Date	Account Titles and Explanations	Debit	Credit
01-01-2020	Right of use of assets	$        43,291
	To, Lease Payable		$        43,291
	( To record the lease liability)
01-01-2020	Lease Payable	$        15,000
	To, Cash		$        15,000
	(To record the payment of lease rental)
31-01-2020	Lease Payable	$   13,868.36
	Interest Expenses ($43,291-$15,000)*4%	$     1,131.64
	To, Cash		$   15,000.00
	( To record the lnterest expenses)