Question

Illini leases another piece of equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments on each 1/1 and the first payment of $10,000 is made on 1/1/20x1. The lease also specifies a 3% annual increase in the lease payments. The equipment has a fair value of $100,000 on 1/1/20x1. The expected useful life of the equipment is 10 years with no residual value. The equipment will be returned to Cubs at the end of the lease term. The implicit rate is 10%.

Date	Account Name (Debit)	Account Name (Credit)	Debit	Credit
1/1/20X1	ROU assets		[A]
		Lease obligation		[B]
1/1/20X1	Lease obligation		[C]
		Cash		[D]
12/31/20X1	Rental expense		[E]
		Accrued interest		[F]
		ROU assets		[G]
1/1/20X2	Lease obligation		[H]
	Accrued interest		[I]
		Cash		[J]
12/31/20X2	Rental expense		[K]
		Accrued interest		[L]
		ROU assets		[M]

Answer 1

As it doesn's fulfil any of the condition of financing lease it is an operating lease.

Date	Particulars	Debit $	Credit $
01-01-01	ROU Asset	$      36,341
	Lease oblogation		$      36,341
01-01-01	Lease oblogation	$      10,000
	Cash		$      10,000
12/31/01	Rental expense	$      10,300
	Accrued interest		$         2,634
	ROU asset		$         7,666
01-01-02	Lease oblogation	$         7,666
	Accrued interest	$         2,634
	Cash		$      10,300
12/31/01	Rental expense	$      10,609
	Accrued interest		$         1,868
	ROU asset		$         8,741

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